Displaying items by tag: bonds

(New York)

Many investors are currently worried about the bond market. There is a lot of uncertainty over just how much rates and yields will rise and what that might mean for the economy. Well, Bloomberg is taking a strong stand on the issue, arguing that a bond Armageddon is on the way. The paper says that all the focus has been on ten-years, but that 30s might be where the danger is. They are within shouting distance of their 2015-2017 highs, and are very close to the 3.24% level, which would signal the difference between an orderly selloff and a full-on rout.

FINSUM: There may be some short-term volatility, but our overall view is that there won’t be a cataclysm in bonds. Global populations are aging and people need income. We expected yields to stay in check and spreads to narrow even if sovereign yields rise.

(New York)

In an article that contrasts strongly to some others we are running today, here is a different view on bonds coming out of the Wall Street Journal—that the bull market is far from over. The argument is based on two interconnected factors. The first is that rates and yields do look likely to rise in the short term, but at the same time, there are many signs the business cycle is poised to end, which will bring on a recession. When that happens, yields will once again plunge, keeping the bond market surging.

FINSUM: If a recession does come then rates and yields will likely drop again. Unless of course inflation sticks around and we get caught in a stagflationary period.

(Washington)

Whether one likes it or not, Treasury yields hitting 3%, which they look bound to do, will be a major event. The big question is what to do once it happens. Is it the signal of a sharp move higher in yields, or will it be the climax to a short-lived selloff? The reality is that if Treasuries move just a little above three, there could be a strong wave of selling. However, strategies betting against volatility have been paired back in recent weeks, so the selling might not be as furious as one might fear.

FINSUM: Nobody has any idea what will happen if Treasuries move above 3%. As far as bonds, we expect that there will be more and more organic buyers above 3%, which should keep things in check. On the stock side, we do not see why a move higher would be too bad, as the spread to equity yields will still be wide.

(New York)

The market did something that seems quite odd yesterday. Despite inflation coming out ahead of expectations and Treasury bonds commensurately selling off, stocks rose strongly. It was the first time the two asset classes had moved in significantly opposite directions in some time. Yields on the ten-year bond extended their four-year high to 2.92%, seven basis points higher than in the previous session.

FINSUM: We have been saying for the last couple of weeks that investors would realize inflation wasn’t necessarily bad for stocks. The market seems to have woken up to that reality.

(New York)

Goldman Sachs put out a big warning to the market yesterday. The bank’s fixed income division says that it thinks yields on ten-year Treasuries are going to rise to 3.5% within two quarters as the Fed continues to hikes rates and the market sells off. Goldman called its prediction “not very brave”, indicating it thinks yields might be higher, especially since it feels the Fed will hike four times this year. Goldman’s forecast for rates is much higher than most analysts, so if it comes to pass, it could have big ramifications for equity investors.

FINSUM: If yields rose to 3.5% or above that quickly, we expect the equity markets would perform very poorly, and it may be the kind of scenario where we have a recession.