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US Bond Yield's Rise Above 3 Percent Yet to Fuel Market Turmoil

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Thursday, 17 May 2018 09:29 AM Current | Bio | Archive

The 10-year U.S. yields have drifted distinctively above 3.1 percent. Logically, this has not caused a sudden turmoil and the Developed Economies are not teetering on the brink of disaster, notwithstanding the move of the U.S. yields has not been welcomed by the Emerging Markets, for good reasons it must be said.

In fact, overall, nothing much has changed. It is as if the difference between a U.S. 10-year yield of 3.1 percent, of course issued and paid for in U.S. dollars than a U.S. 10-year yield of 2.9 percent meant nothing in the real world of the Developed Economies, which unfortunately cannot be said for the real world of the Emerging Economies, especially those that have large proportions of their debt issued in U.S. dollars.

On Emerging Markets, the well-known Harvard professor Carmen Reinhart sounded yesterday really alarming when she said when talking about the Emerging economies: “The overall shape they’re in has a lot more cracks now than it did five years ago and certainly at the time of the global financial crisis. It’s both external and internal conditions … The inflation story is really about interest rates. It’s not the inflation per se. It’s what it implies for the reaction of U.S. monetary policy. The bigger the tightening, the more the anticipation that rates will go higher and higher and that has multiplier (negative) consequences for emerging markets…”

So, Emerging Markets’ investors, will have to perform serious home work that will be needed before engaging in investment opportunities that will always be there.

That said, U.S. and China trade talks start today, a matter complicated by President Trump’s support for the Chinese company ZTE despite allegations that the company broke sanctions against Iran and North Korea.

The Financial Times titles one of its main articles today: “US team divided as trade talks with China begin.”

The FT informs that today China and the US will start a second round of high-level talks aimed at averting a trade war, amid signs of the Trump administration’s internal divide over how to deal with Beijing. Chinese officials are hopeful that Liu He, President Xi Jinping’s top economic adviser, they can reach a deal that would spare ZTE, the Chinese telecoms equipment manufacturer, that suspended its shares from trading in April as a result of the US ban by the US Department of Commerce after ZTE allegedly violated the terms of an earlier settlement related to sales of restricted equipment to Iran and North Korea … Today’s trade talks will begin against a backdrop of continuing divisions between senior officials…

Let's hope it all works out for the best.

Meanwhile , the 28 European Union (EU) heads of government, which included UK Prime Minister May, had a summit in Sofia, the capital of Bulgaria, came to a united stance on trade against the United States, which includes the Issue of trade and Iran where the European Union is looking at ways to assist companies threatened by U.S. sanctions.

In the near term, there is the risk of further trade tensions on multiple fronts and the potential for disagreement, for example, over the so-called SWIFT Brussels-based payment-facilitation system in the financial sector in particular, and through that system the EU’s trade power, and with which the EU is capable of “blunting” U.S. sanctions.

The longer-term serious issue here may be one of global leadership. With the United States becoming a somewhat more “isolationist” country, the European Union (EU) is increasingly taking a leading role in global regularity standards. Companies may have to adjust to EU standards becoming the global standards in the future, which is of course not the situation where we are today.

Finally, Italy’s populist parties say now they have virtually completed a government program which has dropped the request for a 250 billion euro ($300 billion) write-off from the European Central Bank but maintains its pledges of tax cuts, pension reform and a review of European Union treaties.

Markets continue to seem a little bit worried, for good reasons (!), about some of the extreme policies’ suggestions of the populist parties that include a pledge to review European treaties (!) but makes no reference to the euro. They also call for a review of Italy’s contribution to the EU budget with the goal of “making it compatible” with the new government’s economic and fiscal plans.

However, there is still no reason for investors to panic because it does seem unlikely that the more extreme policy positions will ever see the light of day and most of the financial market negative scenarios will also probably (hopefully) be avoided.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
 

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The 10-year U.S. yields have drifted distinctively above 3.1 percent. Logically, this has not caused a sudden turmoil and the Developed Economies are not teetering on the brink of disaster.
bond, yield, market, turmoil
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2018-29-17
Thursday, 17 May 2018 09:29 AM
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