Bond market volatility: change in trend or temporary reversal?

Bond market volatility has experienced a downward trend since the beginning of the year. However, due to geopolitical tensions and the 'higher for longer' key rate expectations, particularly in the US, bond market volatility has shown a rapid rise since the beginning of April. This surge prompts a fundamental question: is it a trend shift or a temporary reversal within a broader downward trend?

Generali's inclination leans towards the latter interpretation. Despite recent declines, bond market volatility remains above its long-term average. While further volatility decreases are expected, driven by declining inflation rates and associated inflation volatility, the path may be uneven. The recent significant rise in inflation expectations looks unsustainable and will likely reverse in the medium term as well. Declining inflation rates should tend to reduce uncertainty surrounding future monetary policy. Therefore, Generali experts expect a 'carry-friendly environment' in bond markets.

However, a less probable risk scenario looms. Should geopolitical tensions, particularly in the Middle East, escalate further, accompanied by soaring crude oil prices and persistent inflation expectations, bond market volatility could intensify in the short term.