By Ric Spooner, Chief Market Analyst, CMC Markets Australia
Whatever markets you trade – indices
; stocks; forex or commodities, the chances are their fate could be determined by how this chart set up plays out in coming days.
Since late January US bond yields have risen significantly. The 30 year bond for example, peaked at 3.12% 10 days ago after hitting a low of 2.2% in late January. In recent days it has retreated a little to 2.98%.
US bond yields have a key impact on just about everything at the moment including equity valuations; the US Dollar; commodity prices and the economy itself. The US has a much higher proportion of fixed term mortgages than Australia. These are priced off bond yields and so rising bond yields potentially have a negative impact on the housing market.
Theoretically the yield investors require on bonds is a function of funding costs (determined by the Fed rate); long term inflation expectations and credit risk. The US bond is traditionally regarded as free of credit risk so investors are looking to cover their funding costs and at least make up for the loss of value caused by inflation over time. It’s never all just about theory of course, good old fashioned demand and supply comes into it and in recent years Central Banks have been buying a lot of bonds. US bonds can also attract safe haven buying in the event of problems elsewhere (e.g Greece)
The selloff in bonds in recent months suggests that markets are beginning to anticipate higher Fed rates; improved inflation and possibly reduced central bank demand for bonds.
A key question for markets is now how fast this bond market adjustment is going to be. If it happens too fast it could have negative implications for the economy and stock markets. The Fed is almost certain to see a gradual rise in bond yields and has expressed concerns about liquidity if there is a panic sale of bonds.
US T Bond head and shoulder
Source: CMC Markets