Rolling coverage of the latest economic and financial newsGovernment bond yields hit one-year highWill inflation force central banks to raise interest rates?Last night, Nasdaq saw worst fall in four monthsWhy rising bond yields is bad for stocks 8.05am GMT The big worry is that the jump in US government bond yields triggers wider turmoil in other asset classes.Bloombergs John Authers has written a great piece on this overnight. He points out that the tantrum in the bond market can have knock-on effects across the financial word.First, the bond market is central to setting interest rates for Americans mortgages. In proportionate terms, the shock to the Fannie Mae 30-year mortgage generally used as a benchmark for U.S. home loans was truly historic. Outside of one day during the worst of the 2008 crisis, and two days during the Covid shock last spring, it was the biggest percentage rise in mortgage rates on record:Higher U.S. rates are generally held to be bad news for emerging markets, as they attract flows away from the sector, and also tend to strengthen the dollar. That in turn can weaken emerging markets that are particularly reliant on dollar-denominated debt. The critical question at what point bond yields become too high for stocks to bear, and cause them to fall. The mantra for the last year, as equities have enjoyed their remarkable post-Covid rally, is that stocks remain cheap compared to bonds. This is true, but the people excitedly buying stocks on this basis might be forgetting that the situation can also be corrected by a fall for bonds, and not just by a rise for equities. The great concern of the Treasury tantrum is the impact that further rises in bond yields could have on other asset classes, https://t.co/aCNI12oX0U via @bopinion pic.twitter.com/e7WNG4Gobi 7.51am GMT Bond yields rise when prices fall is a mantra that became familiar during the eurozone debt crisis, when Greece and Italys borrowing costs rose to dangerous levels, triggering bailouts.During the Covid-19 pandemic, government bond yields fell to record lows, and this weeks rises dont imply worries about countries defaulting, of course. Instead, its being driven by the prospect of better economic growth, and a resulting shunt upwards in inflation.Yesterday proved to be nothing short of a rout in global markets, with the selloff in sovereign bonds accelerating as investors looked forward to the prospect of a strengthening economy over the coming months. Matters werent helped either by stronger-than-expected economic data, which only added to the fears that the Fed could withdraw stimulus sooner than anticipated, and helped Treasury yields see their biggest daily rise since March.On top of this, there were quite obvious signs that the sharp move higher for bond yields was beginning to bite elsewhere, with US equities falling across the board and tech stocks in particular suffering big losses as investors reassessed whether current equity valuations could still be justified in a higher-yield environment. Bond yields could still go higher in the short term though as bond selling begets more bond selling.The longer this continues the greater the risk of a more severe correction in share markets if earnings upgrades struggle to keep up with the rise in bond yields. Continue reading...
