More and more people are singing from the same hymn sheet ..... which of course guarantees nothing.
Friday 7th July 2017
More and more people are singing from the same hymn sheet ..... which of course guarantees nothing.
ref :- "Bond Rout Sounds Warning for Equities That Higher Rates Can Hurt" , Bloomberg Markets
Although this Bloomberg piece is nominally about equities, when all is said and done it's really about rising bond yields and the fast-growing perception that central banks are embarking on the process of tightening super-loose monetary policy. Apologies then if this seems to be going over the same sort of ground that we looked at yesterday, but this is far and away THE topic of the moment, and we'd better get used to it. In fact, US Employment data due later today will be analysed to death for clues as to what it means for the Federal Reserve's intentions on rates and shrinking the balance sheet :
Non - Farm Payrolls due +178,000
Unemployment rate due 4.3%
Year-on-Year Average Hourly Earnings due +2.6%
The Hourly Earnings numbers are even more important than normal, given that the hawks at the Fed and elsewhere will want to see some evidence of wage growth that might give a boost to stubbornly low inflation.
The contention is of course that higher rates and particularly bond yields will eventually undermine stock markets that, in the greater scheme of things, are still trading at close to record levels. The resilience of share prices in the face of North Korean missile tests, Persian Gulf confrontations and Washington turmoil (leading to an inability to enact economic policy) has been truly remarkable, leading some to believe that they'll continue to be able to shrug off rising yields in the bond market. Well, the consensus is growing that they're going to get the chance to find out.
Two familiar market gurus have been airing their views on the matter. Jeffrey Gundlach (CEO DoubleLine Capital) believes that the spike in bond yields is just getting started, whilst Ray Dalio (founder and former co-CEO of Bridgewater Associates, the world's largest hedge fund) has been re-emphasising that the era of central bank stimulus is over. What he really means of course is that investors who have become complacent about central banks bailing out investors with generous additions of liquidity are in for a nasty shock.
We hear you, Gentlemen .... and all the others taking to all forms of media to publicize their belief that we are in the early stages of a sea-change in bond markets. Frankly, on balance it certainly seems like the right call but this is not the first time that an end to the 30-year bond market rally has been announced, only for prices to rally and yields to fall once more.
The last time that share prices and bond prices fell markedly at the same time was during the infamous Taper Tantrum of 2013, when markets (over)reacted to hints of a reduction of Fed stimulus. The Taper Tantrum is getting a lot of air-time at the moment .... as well it might. It would have paid handsome dividends NOT to get caught up in that particular bout of market panic -- the S & P 500 index has returned over 10% per annum ever since. 10-year yields on Treasury Bonds finished the year at 3.00%, but little more than a year later were back down to 1.64%.
More recently, 10-year yields spiked to 2.64% in March as excitement peaked over President Trump's plans for growth and fiscal stimulus ..... only to fall back again to 2.13% (as recently as 26th June) as a more sober assessment of what the President might achieve took hold. At that time, 2.00% yields looked a lot more likely than 3.00% ones but it's the latter number that Mr Gundlach is targeting.
The point is, however strong one thinks the arguments for a particular scenario might be, no intelligent investor can rule out the possibility of things not panning out as predicted .... especially in a case like this when the evidence for significantly higher yields, though persuasive, is weak in certain areas (like inflation).
The question stock market bulls have to ask themselves if they buy into the rising yields scenario, is "Can stock prices withstand the alternative attractions that 3.00% yields offer to investors ?" , a dilemma that Mr Gundlach believes they will face. Of course, he said the same thing about 3.00% yields back in March and that didn't work out so well for short-term traders in particular. Which just goes to show that things happen that even the great and the good haven't bargained for, especially when it comes to timing..... and just because more and more people are aligning behind one view, that's no reason to feel comfortable. When everybody starts saying the same thing, you've got to be more nervous about the size of the reaction if .... just if .... they all turned out to be wrong after all.
ref :- "Bond Rout Sounds Warning for Equities That Higher Rates Can Hurt" , Bloomberg Markets
Although this Bloomberg piece is nominally about equities, when all is said and done it's really about rising bond yields and the fast-growing perception that central banks are embarking on the process of tightening super-loose monetary policy. Apologies then if this seems to be going over the same sort of ground that we looked at yesterday, but this is far and away THE topic of the moment, and we'd better get used to it. In fact, US Employment data due later today will be analysed to death for clues as to what it means for the Federal Reserve's intentions on rates and shrinking the balance sheet :
Non - Farm Payrolls due +178,000
Unemployment rate due 4.3%
Year-on-Year Average Hourly Earnings due +2.6%
The Hourly Earnings numbers are even more important than normal, given that the hawks at the Fed and elsewhere will want to see some evidence of wage growth that might give a boost to stubbornly low inflation.
The contention is of course that higher rates and particularly bond yields will eventually undermine stock markets that, in the greater scheme of things, are still trading at close to record levels. The resilience of share prices in the face of North Korean missile tests, Persian Gulf confrontations and Washington turmoil (leading to an inability to enact economic policy) has been truly remarkable, leading some to believe that they'll continue to be able to shrug off rising yields in the bond market. Well, the consensus is growing that they're going to get the chance to find out.
Two familiar market gurus have been airing their views on the matter. Jeffrey Gundlach (CEO DoubleLine Capital) believes that the spike in bond yields is just getting started, whilst Ray Dalio (founder and former co-CEO of Bridgewater Associates, the world's largest hedge fund) has been re-emphasising that the era of central bank stimulus is over. What he really means of course is that investors who have become complacent about central banks bailing out investors with generous additions of liquidity are in for a nasty shock.
We hear you, Gentlemen .... and all the others taking to all forms of media to publicize their belief that we are in the early stages of a sea-change in bond markets. Frankly, on balance it certainly seems like the right call but this is not the first time that an end to the 30-year bond market rally has been announced, only for prices to rally and yields to fall once more.
The last time that share prices and bond prices fell markedly at the same time was during the infamous Taper Tantrum of 2013, when markets (over)reacted to hints of a reduction of Fed stimulus. The Taper Tantrum is getting a lot of air-time at the moment .... as well it might. It would have paid handsome dividends NOT to get caught up in that particular bout of market panic -- the S & P 500 index has returned over 10% per annum ever since. 10-year yields on Treasury Bonds finished the year at 3.00%, but little more than a year later were back down to 1.64%.
More recently, 10-year yields spiked to 2.64% in March as excitement peaked over President Trump's plans for growth and fiscal stimulus ..... only to fall back again to 2.13% (as recently as 26th June) as a more sober assessment of what the President might achieve took hold. At that time, 2.00% yields looked a lot more likely than 3.00% ones but it's the latter number that Mr Gundlach is targeting.
The point is, however strong one thinks the arguments for a particular scenario might be, no intelligent investor can rule out the possibility of things not panning out as predicted .... especially in a case like this when the evidence for significantly higher yields, though persuasive, is weak in certain areas (like inflation).
The question stock market bulls have to ask themselves if they buy into the rising yields scenario, is "Can stock prices withstand the alternative attractions that 3.00% yields offer to investors ?" , a dilemma that Mr Gundlach believes they will face. Of course, he said the same thing about 3.00% yields back in March and that didn't work out so well for short-term traders in particular. Which just goes to show that things happen that even the great and the good haven't bargained for, especially when it comes to timing..... and just because more and more people are aligning behind one view, that's no reason to feel comfortable. When everybody starts saying the same thing, you've got to be more nervous about the size of the reaction if .... just if .... they all turned out to be wrong after all.
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