Investors rushed into the safe haven of US bonds overnight on a wave of disappointing economic data only to exit it just as fast, causing a massive intra-day swing in the yield on 10-year US treasuries, which at one point dived as much as 14 per cent.
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Overnight, US 10-year treasury yields dropped from a high of 2.17 per cent to a low of 1.86 per cent in just over an hour, only to recover back to 2.15 per cent late in the trading session as investors took profit and sold off bonds. Bond yields move inversely to prices.
"It was out and out carnage on the bond market," said National Australia Bank global co-head of FX strategy Ray Attrill.
He added that the intra-day yield crash was among the worst that he could recall to hit the bond market, and overshadowed the 2010 'flash crash' in the US stock market.
The catalyst for the sharp fall was the release of a string of US economic data including retail sales, producer prices and the empire manufacturing survey, which were all significantly weaker than expected.
"US 10-year government bond yields went from 2.17 per cent to a psychologically important point of 2 per cent within the hour that followed the data release. After that we saw wholesale capitulation and everybody rushed for the exit, which lead to a dramatic decline to 1.86 per cent, which is one of the biggest intra-day moves that I can remember," said Mr Attrill.
Elsewhere, the US S&P 500 also plunged overnight, dropping 3 per cent at one point before recovering to close down 0.8 per cent at 1862 points. Australia's benchmark S&P/ASX 200 is expected to fall 0.8 per cent or 42 points when the market opens this morning.
One catalyst for the recovery was a Bloomberg news report where Federal Reserve chair Janet Yellen expressed confidence the US expansion would continue despite international risks, which include slower global growth particularly in Europe, the Ebola health outbreak crisis and conflict in the Middle East.
In 2010 the May Flash crash was blamed on a combination of a large mutual fund block trade quickly followed by an large flurry of selling by high-frequency trading (HFT) firms.
Mr Attrill said the event shows that volatility has "returned with a vengeance."
The re-emergence of volatility in financial markets comes after a sustained period of calm and is spiking ahead of next week's Federal Reserve Open Market Committee meeting, where Ms Yellen is expected to announce the end of the central bank's lengthy bond buying program.
