Markets have long contemplated the day when the global bond sell-off begins and creates  a knock on impact on share and property valuations. Despite, this week’s dovish comments by Fed Governor Brainard, investors have clearly decided that the time has come to make sure they are not late to the party in selling bonds.

Markets are reacting to a growing impression that the ECB and Bank of Japan are unlikely to add significantly to current stimulus plans while the US Fed will gradually move to lift rates. This adds up to the possibility of a slow transformation away from global monetary stimulus and creates medium term risk to bond prices at current very high levels. Whether the Fed lifts rates in September or December becomes a relatively minor timing issue in this broader context.

It has long been recognized that investors may need to act urgently in these circumstances to avoid significant capital losses on bond portfolios. This appears to be weighing on markets at the moment and a typical market dynamic where selling and lower prices creates further selling pressure is developing.

However, the extent of the current bond sell-off is likely to be limited by low inflation in the short term. This will ensure that the pace at which central bank stimulus is removed remains glacial. The fear of losing out in a medium term sell-off on the one hand and low inflation on the other may bookend markets for a while setting up a period of increased volatility.

Ironically, the International Energy Administration last night predicted it would take longer for the oil market to return to surplus than it was previously forecasting. If this is correct, lower for longer oil prices will act to keep a lid on inflation and the extent to which bond yields rally.

The share market will remain nervous while the current bond sell-off continues. In these circumstances, the market will be vulnerable to repeats of yesterday’s action on Australian markets where rallies are sold. However, investors will also be conscious that the ASX 200 index is already down 7% since early August.