No matter which way the bond bull market ends, it’s going to get ugly

August was a quiet month for markets. "Too damn quiet", as your average action hero might put it.

And so it turns out. Last month, volatility (put simply, the scale of the market's ups and downs) was very low in fact, US volatility hit a 16-year low at one point.

But low volatility tends to breed higher volatility, and that's what we got on Friday.

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Volatility rocketed by nearly 40%. The S&P 500 in the US shed almost 2.5%, while the Dow Jones dropped by 2% nearly 400 points.

But what's more pertinent is what happened to bonds

Two ways for this bull market to end the hard way or the harder way

Now don't get me wrong. Bond yields are still extremely low. But it's interesting to see that yields are now back to where they were before the Brexit vote helped to scare the market into expecting another round of mass quantitative easing and central bank intervention.

Instead, now, the only central bank that has done anything is the Bank of England. The European Central Bank sat on its hands on Thursday. The US Federal Reserve's members are making the usual mixed noises I doubt very much that they'll raise rates in September, but they like to keep the market on its toes. And in Japan, no one has any idea what's coming next, but they're pretty sure it'll create some sort of reaction.

Are we finally at a turning point for the great bond bull market? Deutsche Bank reckons so.

According to Bloomberg, they've outlined two main scenarios. The best case scenario is the long, slow, mildly painful option. Bond holders lose money in real terms ie after inflation over a period of decades.

"The best example of this through history was the post-World War II period where government debt was at similar levels to that currently seen. Over the next 35 years this debt was successfully eroded by a long period where nominal GDP was notably above bond yields."

Remember, that's the best case scenario for bond holders. To lose a large chunk of money slowly and stealthily.

So what's the worst-case scenario?

Well, that's where a big developed country (or more than one) defaults on its bonds, "taking a lot of other debt with it domestically and possibly internationally. This is probably most likely to happen via politics especially in Europe if a country decides to leave the single currency. Under this scenario, non-core government bond markets could see huge losses as the central bank backstop bid is removed."

Everything's expensive

We've seen a 35-year supercycle, and now it's reversing. "We don't think it's a coincidence that asset prices were historically very depressed in 1980 and arguably at all-time lows in valuation terms. 35 years later and traditional asset valuations in major developed markets have never been higher."

The investment industry likes to argue that when bonds fall, equities will go up there's always something rising. But both bonds and equities have risen together largely over the last 35 years. So there's nothing to stop them falling together too particularly given that it's at least partly the availability of cheap debt that has helped to fuel recent equity gains.

So how will we know if it's all over, or this is just another false alarm? After all, maybe it's just pre-US election jitters (particularly now that it turns out that Hillary Clinton has pneumonia).

John Authers in the Financial Times makes the point that defensive stocks those that are sometimes bought as bond substitutes by yield-hungry but risk-averse investors are starting to underperform cyclical stocks. Dividend stocks are dropping out of favour too.

Banks are also "in recovery mode", says Authers. This is a theme that my colleague Charlie Morris over at The Fleet Street Letterhas been talking about for a few months now the shift towards more cyclical stocks.

We'll see what happens. The next big date in the calendar is 21 September. That's when the Fed next meets. And it's also when the Bank of Japan analyses whether its monetary policy is working or not, and tells us what the next step is.

Whatever happens, bonds are on borrowed time. And when this particular bubble bursts, it could get very messy indeed.

This is an issue we'll be tackling in a lot of detail at this year's MoneyWeek conference next month, with experts including Russell Napier and Tim Price. Tickets for the event are now sold out, but you can sign up to receive the audio version. Don't miss it I think this'll be easily the most important topic in finance for years if not decades to come.