The “violent spike” in US and global bonds yields over recent days “is extremely odd” and perhaps even very dangerous for investors, one expert warns.
Yields on 10-year Treasurys - the benchmark borrowing cost for international finance - have jumped 19 basis points to 1.72 percent since the middle of last week. The amount of global government debt trading at rates below zero has suddenly fallen from $10 trillion to $8.3 trillion, with parallel effects for corporate bonds, according to the U.K. Telegraph.
And this is happening as the growth rate of nominal GDP in the US has fallen to 2.4 percent, the lowest level outside recession since World War II. “It has been sliding relentlessly for almost two years, a warning signal that underlying deflationary forces may be tightening their grip on the US economy,” the Telegraph’s Ambrose Evans-Pritchard wrote.
“Given this extraordinary backdrop, it is rare for AAA-rated safe-haven debt to fall out of favor at the same time as stock markets, and few explanations on offer make sense,” he wrote.
“We are entering dangerous waters. Markets are losing faith in the central bank "put", but governments are not yet willing to step into the breach with fiscal stimulus to keep the global show on the road. This is how accidents happen,” he warned.
“The correlation between bonds and equities has reached unprecedented levels, and that has the coiled the spring. The slightest rise in yields now has a potent magnifying effect across the spectrum of assets. Hence the angst over what is happening to US Treasurys,” he said. “You would have thought that inflation was picking up in the US and that the Fed was about to slam on the brakes, but that is not the case. The markets are pricing in a mere 15pc chance of a rate rise next week, and the figure has been falling. If anything, the US inflation scare has subsided.”
In the wake of a slew of broadly disappointing U.S. data, punctuated by a miss on retail sales for August with a negative revision to July's reading, S&P 500 futures fell on Thursday — but bond yields moved higher as prices on government debt also fell.
“The oddity of stocks falling in tandem with bonds is difficult to explain, because government bonds are typically where investors seek safety, whereas stocks are well-bid when risk appetite is healthy,” Bloomberg News reported.
To be sure, fears that the era of super-charged central bank stimulus could soon end have sent tremors through global bond and stock markets, but the spike higher in borrowing costs may yet offer the financial system a crumb of comfort: steeper yield curves.
The gap between two-year and 10-year government bond yields has widened recently, with Japan's curve more than doubling to its steepest in seven months. The U.S. curve is at its steepest since June and the euro zone's its steepest since May, Reuters reported.
A yield curve steepens when the gap between long- and short-dated bond yields widens, and is usually symptomatic of a broadly healthy economy and financial system.
Typically, investors demand higher yields for lending to governments for longer periods to compensate for the greater inflation and credit risks.
(Newsmax wire services contributed to this report).
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