Bond crash across the world as deflation trade goes horribly wrong

The scale is starting to match the 'taper tantrum' of mid-2013 when the US Federal Reserve issued its first gentle warning that quantitative easing would not last forever, and that the long-feared inflexion point was nearing in the international monetary cycle.''

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The epicentre is in the eurozone as the "QE" bet goes horribly wrong. Bund yields hit 1.05pc this morning before falling back in wild trading, up 100 basis points since March. French, Italian, and Spanish yields have moved in lockstep.

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The bond crash has been an accident waiting to happen for months. Money supply aggregates have been surging all this year in Europe and the US, setting a trap for a small army of hedge funds and 'prop desks' trying to squeeze a few last drops out of a spent deflation trade. "We we're too dogmatic," confessed one bond trader at RBS.

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Economic historians will one day ask how it was possible for €2 trillion of eurozone bonds - a third of the government bond market - to have been trading at negative yields in the early spring of 2015 even as the reflation hammer was already coming down with crushing force.

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Funds thought they were on to a one-way bet as the European Central Bank launched quantitative easing... Instead they have discovered that the reflationary lift from QE overwhelms the 'scarcity effect' on bonds. Contrary to mythology - and a lot of muddled statements by central bankers who ought to know better - QE does not achieve its results by driving down yields, at least not if conducted properly and if assets are purchased from outside the banking system. It works through money creation. This in turn lifts yields.

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The risk is that rising borrowing costs in the US will set off a worldwide margin call on dollar debtors - or a "super taper tantrum" as the IMF calls it - that short-circuits the fragile global recovery and ultimately ricochets back into the US itself. In the end it could tip us all back into deflation.