Is This The Start Of A Bond Bear Market?

Monday, 12 Feb, 2018

Here we go again: Worries about the bond market are driving heavy selling on Wall Street.

The stock market appeared to be making a comeback after historic plunges on Friday and Monday.

Cabana said his call for a 2.90 percent 10-year this year is clearly at risk.

On Wednesday, U.S. congressional leaders arrived at a two-year budget deal, in order to raise spending on military and domestic areas by close to $300 billion. Similarly, between May 2003 and June 2006, the 177 bps surge in the UST 10-year yield failed to deter USA equities from notching up gains of 32 per cent.

The dollar index was flat, with the euro down 0.03 percent to $1.2258.

The U.S. dollar rose against a basket of currencies as the U.S. bond market selloff leveled off. Investors should bear in mind that almost a quarter of government bonds are still negative yielding and more than 90% of bond globally still yield less than a 10 year Treasury, so the demand for yield should naturally act as a constrain on surging yield levels. Jobless claims are released Thursday morning at 8:30 a.m. ET, but there's no major data until CPI and retail sales data next Wednesday. It's been pretty ugly.

Investors in utility and real estate stocks - and indeed all dividend-paying equity sectors - should, however, recognize the threat that further increases in bond yields would present to future portfolio returns.

In Asia on Monday, Tokyo dived 2.6%, while Hong Kong sank more than one percent and Sydney closed down 1.6%. Franzese says the big question everyone is asking themselves is whether this is a blip or there's something bigger at work: "A lot of people are sitting on cash and trying to decide what to do". While viewed by many as a handy way of gauging relative value, corporate earnings and bond yields aren't the same - they move with different volatility and different sensitivity to inflation. Traders are rushing into the safety of bonds amid the selling, pushing yields in the belly of the Treasury curve down more than 10 basis points.

"You could get into a little bit of circular logic here, as you hand leadership back and forth".

"In the case of risk aversion, we might see support for core government bonds", said Mathias van der Jeugt, head of market research at KBC.

And the stock market is now in a correction - 10% off its record high just two weeks ago.

Fear has now replaced greed in the stock market.

"If I have to choose bonds or equities, with interest rates going up, bonds just got more attractive", she said.

Friday's employment data was strong and, in particular, wages growth is starting to accelerate in the USA, which means that the Fed may have to raise interest rates more and as a result bond yields may rise even more significantly. At the same time, the US deficit is growing and would be bumped up even more by the Senate budget deal, if it passes Congress. Both industries are capital-intensive, requiring frequent loan rollovers and bond issues, so higher borrowing costs have outsized effects on bottom line profits.

Bond yields are hardening globally, sending panic wave across global equities.

The market is nervous about new supply coming to the market this year as the Fed not only raises rates but continues its program to buy fewer and fewer Treasury securities, in the unwind of extraordinary easing instituted in the financial crisis. The ECB [European Central Bank] cut their quantitative easing in half.

That has "toned down the straight line move on equity markets, led to a more volatile environment and limited the potential for equities", Francois Savary, chief investment officer of a wealth management firm, speaking on investors' bullishness before the recent correction.

Many equity markets were already in negative territory last week owing to rising bond yields and profit-taking.