Rise in bond yields may be more durable this time - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that we have seen a rapid run-up in global bond yields, in a speed that resembles the 2013 so-called ‘Taper Tantrum’ while the other significant bond market correction in recent years was a short-covering rally soon after the ECB began its QE program in 2015.

Key Quotes

“In these two previous occasions the bond market correction was driven largely by two specific markets; US Treasuries in 2013 and German bunds in 2015.  The most recent rise in yields has had its genesis in rolling developments among all the major countries; Japan’s shift to Yield Curve Control, ECB proving reluctant to add to QE and both these countries/zones seeing problems with negative rates and flat yield curves.  UK yields began to reverse post-Brexit falls as the GBP fell sharply and economic data proved resilient generating higher inflation expectations.  The Trump election triggered a new wave of rises in US yields.”

“Since early in the year there has been increasing pressure from across G20 policymakers to pursue more infrastructure spending, and this theme has been given a big boost by Trump’s election promise.”

“China can also be seen contributing to the rise in yields with big rises in Chinese steel prices and a turn up in its broad and underlying inflation measures, suggesting it has turned from being a long run deflationary force in the global economy to a source of inflation.”

“The most recent US economic data has been stronger than expected, including strong retail sales today.  Importantly for the Fed’s inflation outlook, USA wage indicators are showing consistent gains over the last two years.”

“The broad nature of the recent set of developments driving up yields and the record low starting level of yields, suggests that the rebound underway may end up being more significant and durable than the previous periods seen in 2013 and 2015.”

“The rise in yields may also be more significant because the market has turned from a significantly overbought condition.  In Q3, post-Brexit, it may have seemed that QE programs were unending and central banks had no choice but to keep pursuing these policies even as they may not be working.  The US Federal Reserve was fixated by weak productivity growth and its members were revising down their long-run neutral policy rate.  There was a growing perception that yields would remain low for the foreseeable future.”