LONDON The global bond market shock of recent weeks may be closer to an 'old normal' than some new world of fragile, over-regulated markets posited by many banks and brokers to explain the rout.
One narrative behind the surge in bond yields around the world since May has been that complacent investors simply overreacted to the relatively mild prospect of gradually less bond buying by the U.S. Federal Reserve over the next 18 months.
That certainly seemed to be the view of central bank policymakers in Europe and around the world last week.
But, perhaps unsurprisingly, some in the banking world lay the blame for the outsize reaction on tighter post-crisis regulation of bank capital, risk taking and in-house dealing.
The suggestion is that new laws aimed at preventing excessive risk in banking - such the Dodd-Frank on overhauling Wall Street, the Volcker rule on stopping proprietary trading or even the European bans on speculative trading in credit default swaps - have had their first stress test and the results are not pretty.
By crimping the capacity of the broking and dealing world to absorb and mediate heavy investor sales, the argument goes, then markets are now more prone to such sudden evaporation of market liquidity and savage price swings - particularly in lower-rated emerging market debt or corporate junk bonds.
One alarming contrast shows the size of U.S. corporate bond market expanded by about $2 trillion since the credit crisis hit in the summer of 2007 to more than $5 trillion - but primary dealers' corporate bond positions have fallen to about a third of 2007 levels to less than $100 billion.
Initial 'overreactions' then feed off themselves as short-term players herd to the exits while ever wider price swings deter buyers and banks sensitive to spikes in volatility-driven 'value-at-risk' models.
The inference is that regulators have made markets more dangerous in their attempt control risk taking.
Yet that case only stacks up if market behavior was substantially different to previous bond selloffs and many asset managers doubt that.
"People are mis-remembering how liquid or illiquid markets were in the past," said Ben Bennett, credit strategist at Legal & General Investment Management.
While there's little direct evidence of cause-and-effect from regulation, few people deny the speed of the yield surge, the widening of gaps between buying and selling prices and a sharp resurgence of volatility. After a 20-year bull market in government bonds, such a turn was always going to be messy.
Benchmark 10-year U.S. Treasury yields have jumped more than a percentage point to about 2.7 percent since early May. The additional premium on emerging market sovereign bond yields surged at least by that much again.
These are brutal moves, not least for an asset class such as emerging markets that returned almost 20 percent last year.
Bank of America Merrill Lynch estimates that by the first week in July bond investors were already experiencing their worst annualized losses in U.S. Treasuries since 1978 and the worst since 1998 in emerging market bonds. A record $58 billion streamed out of global bond funds over the prior four weeks.
With investors citing bid/offer spreads on some emerging sovereign bonds blowing out three or four times the super lows of earlier in the year as market makers seemed to disappear.
Volatility soared. Merrill's Option Volatility Estimate (MOVE) index that measures implied one-month volatility in U.S. Treasury bonds has doubled since early May - albeit only back to late 2011 levels.
So is this really a market cowed by regulators where the broker/dealers are just not able to cope with selloffs in same way they could prior to the credit crisis in 2007?
Bond investors reckon that this is only part of the story.
The peculiarity, funds say, was more the past four years of Fed dollar printing that saw the boom in primary bond sales in the high yield corporate and emerging market areas dominate the market as investors escaped from record low benchmark returns.
Buying new bond issues from governments at auction or through syndications when demand is high is relatively easy but gives a false impression of secondary-market liquidity should you ever need to get out in a hurry.
"It's not so much that in this particular case the dealer community was more risk averse or less risk averse," said Scott Thiel, head of European and Global bonds at BlackRock - the world's biggest asset manager with almost $4 trillion under management.
"It's more that the liquidity of the product (emerging market bonds) is very poor and investors have forgotten that in their march to amass these huge quantities of illiquid bonds," said Thiel, adding regulatory pressure on the dealing community to de-risk only added to that.
Liquidity always seems good until you need it, as market wags say.
At least the latest panic had a fundamental underpinning in the form of monetary tightening rather than some idiosyncratic market malfunction. Markets may seize up quicker now but may also be less prone to chronic indigestion than in the past.
"I think five or six years ago, we would have ended up in the same place. And it might have even been worse back then," said Bennett at L&G.
(Additional reporting by Sinead Cruise. Editing by Ron Askew)