In her testimony about the outlook before the Joint Economic Committee, US Federal Reserve Chairwoman gave investors further reason to believe that a rate hike is imminent and the market is now pricing in an almost certainty of a rate hike in the 14 December FOMC. At the time of publication, the market is 98% certain that a 0.25 basis points rate hike will be announced, up from 80% two weeks ago. But what is more important for the greater scheme of things is how many rate hikes are to be expected in 2017 and the pace of the rate hikes (timing between one rate hike and another) particularly the implications this would have on the US sovereign yield curve, emerging markets and pretty much bond markets on the whole.

The dust is yet to settle after the US presidential elections, as investors and traders begin positioning and anticipating the implications of the policies of the new presidency. Inflationary expectations in the US are expected to rise under Trump, which explains in the main why there has been a sharp re-pricing in the bond market, particularly at the longer end of the spectrum.

A similar pattern has also been registered in longer dated sovereign bonds in the Eurozone, with both core and peripheral spreads bearing most of the brunt. For those investors who had been accustomed to an upward sloping chart illustrating ever increasing bond prices, this sharp correction has caught many unawares and perplexed as to what is going on in the market.

Let’s face it. Who has been invested in sovereign bonds, both in the US and in Europe have, at least till 4 weeks ago, had a good run for their money. On a risk-adjusted basis, even more so as the strong performance in European sovereigns, particularly over the past 5 years, was not commensurate with the risk of the underlying government risk. But we must all appreciate that the market dynamics of recent years can be termed as anything but ordinary.

Central Banks have had their say in keeping these bond prices not only supported but have also pushed prices higher. Loose monetary policy such as quantitative easing, CSPP (Corporate Sector Purchase Programme) and PSPP (Public Sector Purchase Programme) are all but a number of policies adopted by the European Central Bank over recent years whose sole aim was to propel economic activity in the single-currency region and achieve its long-term target inflation of 2%. Though still a far cry away, we must admit that inflation is beginning to slowly creep upwards and there have been positive strides in economic numbers by European economies. So some form of progress has been registered after painful years of austerity and lacklustre growth.

And this is the main reason why European sovereign bonds have sold off sharply. At present, the ECB is purchasing up to €80bn worth of bonds in a month, which, so far is scheduled to terminate by end March 2017. It is yet unclear as to whether this program of asset purchases will be prolonged any further but speculation is rife that the size of the program will be either trimmed (size of monthly purchases reduced) or terminated altogether. Another option which is still plausible but one that the market is clearly not buying into is that the programme will be prolonged and the size of purchases unaltered.

I would lean towards the expectations that the monthly purchases will go on beyond March 2017 and the size of the monthly purchases reduced. And it is precisely this which is causing jitters to investors, this withdrawal of support and liquidity to a market which had become perhaps too accustomed to the reliance of central bank activity to keep bond prices supported. We must appreciate the fact that support cannot remain ad-eternum and if inflation and economic activity do show sustainable signs of improvement, the QE and all these years of supportive central bank activity can be termed as a slight victory to Mario Draghi, albeit acknowledging that this came at quite a cost.