In the past few days, global bond markets, have entered a strong bear phase, thanks to Central bank messaging about controlling inflation – transitory now having been largely dropped (perhaps except in Australia), and so as bond prices fall, bond yields rise with a renewed push toward new multi-year highs.
There is clear bearish momentum, on bonds, but it is also supported both by technicals and data outcomes such as the upside surprise in the US jobs report last Friday. In the US, the market was already debating the prospects for a 50bps hike in March and that speculation is only likely to grow, despite the fact that the forward cash profile already implies more than 5 rate hikes in 2022.
US 10yr yields are up 20bps, while the 2yr counterparts which are higher by 30bps over the past fortnight. So, we should expect a move toward 2% for US 10yr bond yields and above.
As to what happened beyond, there is on one hand a clear path to higher bond yields, as prices continue to fall, so many holders will be looking to sell into any strength, to de-risk. But we need also to ask the impact on corporate bonds, and other loans, because, higher rates cost.
But the point is this seismic shift in rates will have consequences, and you have to ask how things will play though into equities. The short answer is, prices will fall, but the longer answer is it will depend on the sector with companies able to pass rising costs on, and with positive cash flow and lower debt better placed.
To me the investment landscape is highly uncertain, so perhaps a time to remain cautious, rather than chasing the next meme.
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