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The bond market sell-off which began back in July and intensified since the US presidential election continues in Asia today with US 10-year treasuries rising to 2.49% – their highest level since June 2016.
That selling has translated to higher rates and falling prices across developed market bond curves even though the outlook for interest rates across most of the developed world – with the exception of the US – is for central bank rates to remain unchanged for an extended period.
Earlier today the Australian 10-year bond traded up to a high of 2.91 – its equal highest rate for 2016.
US, Australian, UK, and German 10-year rates daily (Source: Reuters Eikon)
Only the Fed is expected to raise rates any time soon. But bond curves the world over are steepening as traders and investors bet that there will be some leakage into the global economy from Trumponomics’ reflationary impact on the United States.
For example, the Australian bond curve at 95.8 points is the steepest it’s been between the 2- and 10-year government bond since the middle of 2015. It’s moved in line with, and in an accelerated way outperformed, the steepening in the US bond curve.
Australian and US 2-10 bond spread daily (source: Reuters Eikon)
Whether the bond market rout continues is an open question.
Last Thursday, Goldman Sachs’ legendary strategist Abby Joseph-Cohen told Tom Keene on Bloomberg that Goldman thought rates were on their way to the 2.8% region. That’s another 30 basis points of selling to go.
Over the weekend, the Bank of International Settlements – often thought of as the central bank’s central bank – didn’t try to pin the tail on an outright level for rates but simply asked whether the moves post-election would stick.
Claudio Borio, head of the Monetary and Economic Department at the BIS, in comments accompanying the release of the latest quarterly review, asked himself the question of whether we are “facing a market overreaction or a paradigm shift?”
It’s too early to tell, he concluded, but the behavioural economics and finance guy in me suggests he answered his own question when he said:
“What is surprising is that it took just one political event to seemingly dispel, in one fell swoop, the market’s belief in a future of persistently ultra-low interest rates, secularly low growth and disinflationary pressures. These events could finally represent the long-awaited beginning of a welcome normalisation process from the extraordinary post-crisis conditions. But the jury is still out, and caution is in order. And make no mistake: bond yields are still unusually low from a long-term perspective. “
Bonds bottomed 3-4 months before the US election. Janet Yellen and her colleagues were actively floating the idea of letting the economy run hot before increasing interest rates aggressively.
So the market was primed for the message that Trumponomics delivers on the potential lift in inflation and nominal growth.
As the BIS’ Borio suggests, under that environment, rates are unusually low and this bond market rout could have legs.