A regime shift in financial markets?

By January 24, 2018 15:02

A regime shift in financial markets?

The 10 year US government bond yield recently reached its highest level since 2014. The yield on the 2 year pendant rose to the highest level since 2008. Many investors now ask themselves whether these moves mark the end of the decade long bond bull market or even an outright collapse. This would have wide-ranging consequences. The price of US Treasuries — “the mother of all assets”— is often seen as the most important price anchor in the global financial system, carrying a lot of information about markets and the economy. A reversal in the multi decade down trend in interest rates would mean a regime shift for markets and the economy, which in some peoples view have become addicted to ever falling interest rates. Are we there yet? Volatility in bond markets is expected to rise, but we don’t think the recent market development marks a major trend reversal. The repercussions of “Trumponomics”, as well as inflation bottoming in the short term, might cause a repricing of the Fed, lifting core yield in the coming months, especially in the short end of the curve. Medium term however, we think the low yield environment is not under threat yet. Ultimately, the rise in yields is expected to be self-correcting to some extent amid front-loaded benefits from US tax cuts, still high leverage in most regions, demographics and no signs of accelerating wages. In order to come to grips with the rise in core government bond yields, let’s first take a look at the drivers behind the moves. 

By January 24, 2018 15:02



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January 2018