The global bond market has experienced extraordinary turbulence in April 2025, with sudden volatility that veteran traders describe as unlike anything seen since the pandemic. As we discussed with Christian Bayliss of Fortlake Asset Management this week, this wasn't a gradual build-up to the crisis but rather "literally one day, it was a cliff."

What Triggered the Selloff?

The recent bond market rout has been driven by a perfect storm of factors. U.S. Treasury yields surged sharply in early April, with the 10-year yield jumping from below 4% to as high as 4.5% - one of the largest weekly moves in recent memory. The immediate trigger appears to be President Trump's aggressive tariff policies, coupled with his unprecedented public attacks on Federal Reserve Chair Jerome Powell.

Trump is stepping away from global alliances, making America great again, making America first, disenfranchising America with its allies Christian explained."All of these sorts of things are basically a fragmentation argument that maybe the world does need to consider something else.

The Liquidity Crisis

Perhaps most concerning for market participants is the severe lack of liquidity in traditional bond markets. Christian highlighted how post-GFC regulations have fundamentally changed market dynamics - "when you've got huge amounts of volatility, the sell side and the brokers basically pull down the shutters and they're closed for business".

This regulatory environment creates what he calls "gap risk" in markets. When volatility spikes, capital requirements make it increasingly expensive for banks to hold bonds, creating a situation where "if you go out and try to sell $10 million of CBA bonds in this environment, you can't do it. There is no bid."

Market data confirms this assessment while also hinting that trouble may have been brewing with investors withdrawing heavily from U.S. bond funds for five consecutive weeks. Outflows totaled over $10 billion in the week ending April 16 alone, while volatility measures hit an 18-month high.

Is This a Regime Change?

The more profound question troubling investors is whether we're witnessing the early stages of a fundamental shift in the global financial order. Christian suggests the confiscation of Russian reserves following the Ukraine invasion first raised questions about the U.S. dollar as the ultimate safe haven.

Trump's recent comments have intensified these concerns. His escalating criticism of Fed Chair Powell - calling him a "major loser" and threatening his removal - has rattled global markets. The Wall Street Journal and other major outlets have reported that such attacks could undermine the credibility of the Fed and the safe-haven status of U.S. assets.

Investment Implications

For investors, this volatility creates both risks and opportunities. Maybe bonds in other jurisdictions like Australia start to look increasingly attractive compared to U.S. bonds, with similar yields but less uncertainty and volatility. Could this be the early signs of a trend that Andrew Hunt of Hunt Economics flagged in visits here last year whereby a new breed of strong currencies appear, including some emerging market candidates. This would suggest that this is unlikely to be like cycles that we have seen before, or at least in the post-WW2 period. Recent market data also shows short-term government bond funds have seen record inflows (over $18 billion so far in April) as investors seek safety in the shortest maturities, a bias that Fortlake also concurred with. 

For Australia specifically, Christian also remains optimistic that funding conditions for banks will remain stable despite the global volatility and, with the local bond market now pricing in 4-5 rate cuts for the year, it could be a win/win for Australia and it's potentially hard pressed mortgagees. The real question is whether we are witnessing the beginning of a multi-decade shift away from U.S. dollar dominance - a process that Christian suggests could take decades 'or even a hundred years" to fully unfold.