Last night’s relative calm in equity prices has masked the turmoil brewing in the global bond markets. 10-year gilts, bunds and treasuries fell by 0.75, 0.6 and 1.14 points respectively. US 10-year treasuries crossed above 2.25%, their highest yield this year. The 30-year fared worse, losing more than 2.5 points to yield above 3%. In the US, the yield curve steepened as markets prepared to welcome the return of inflation once more. The traditional link between bonds and equities in capital markets calls for an inverse relationship in terms of price action. Meaning to say, in normal times, when investors sell bonds because of the fear of rising inflation and hence higher interest rates, stocks are sought after because inflation is traditionally viewed as a positive driver, as it gives pricing power to businesses. These are not, however, normal times. After the past eight years of unprecedented Central Bank easing and monetary expansion, capital markets all over the world have been intoxicated by the influence of cheap money. Both bond and stock markets have been on a bull tear because of this easy money. As a result, with this relationship - between bonds and stocks - now totally dulled by the ‘unnatural’ flow of excess capital, it would be hard not to expect stocks to suffer a similar sell down. Key eurozone data due tomorrow may set things off again - on the downside - for fixed income, while high-yielding equities - including REITs - may also see nervous selling, especially if we receive further indication of a ‘normalisation’.
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