The yield on long-term government bonds, for example, rose from a monthly average of 12.9 per cent in April to over 18 per cent in September, and fluctuated widely on a daily basis to peak at over 21 per cent at one stage. The adverse effects of the net selling of bonds by non-residents quickly spilled over into the market for foreign exchange.
Such apparent herding behavior, reflecting a collective loss of confidence, may be generated by a market infrastructure that induces co-movements across markets and institutions during times of stress. In these circumstances, contractual provisions that might seem on the surface to be prudent counterparty risk management could increase financial market stress.