Bill Gross: a turning point for bonds

February 09 13:01 2018

“As rates rise, things, as far as equity investors are concerned, are getting worse”, he said.

Treasury yields, which were nearly flat in U. Two weeks later, another billionaire, Ray Dalio of hedge fund firm Bridgewater Associates, piled on with a forecast of the worst bear market since the early 1980s.

At prevailing bond yield of 7.56 per cent, one would then require 13.56 per cent (adding 6 per cent risk premium) on equity to make a switch from bonds.

In the end, the S&P 500 sank 3.8 percent, taking its rout since a January 26 record past 10 percent to meet the accepted definition of a correction. The since February 2016.

But there’s another, less prominent factor, underpinning renewed market volatility, which is affecting asset prices around the globe: fears of a currency war started by USA official rhetoric on the benefits of a weaker dollar.

The index was back up above the 30 level on Thursday. It’s been pretty ugly.

His data show “higher yields and superior equity returns have generally gone hand-in-hand”.

Government-bond prices have been in decline recently, and as a result the yield on the United States ten-year Treasury bond has been rising (yields rise as prices fall). “Now they are saying we will take out the steroids, because it could have side-effects”, said Nilesh Shah, MD at Kotak AMC.

In addition, while a ten-year note that yields close to 3% looks shocking after almost a decade of ultra-low rates, it is not that big a deal. Wage inflation means core consumer price inflation index could well rise well above 2.5 per cent by this summer and force the new Fed Chairman Jay Powell to respond to prove that the U.S. central bank is not behind the inflation curve.

“You could get into a little bit of circular logic here, as you hand leadership back and forth”. At the same time as ten-year break-even rates have risen, so have oil prices.

Equities for years have looked relatively attractive compared to the low yields offered by bonds, but the rise in Treasury yields has diminished the lure of stocks, especially with stock valuations at historically expensive levels.

At last, the markets are “catching up”, said Nandini Ramakrishnan, a global market strategist at JPMorgan Asset Management.

“Higher rates are going to slow the economy, we just don’t know when and we don’t know which rates to watch, and I think that’s the debate that’s now playing out in the market”, he said.

Fears of inflation linked to a falling dollar are driving up bond yields and fueling expectations of potentially four interest rate hikes from the Fed this year. Trump’s tax cuts have also expanded the deficit.

“It’s just the latest log on the fire”, said Schumacher. That compares with $420 billion net past year in notes and bonds.

While not everyone is in love with the comparison, many investors feel safe when that number is comfortably above Treasury rates – which it is, by about 1.5 percentage points.

Germany’s 10-year yield climbed two basis points to 0.76 percent.

“We’re in this interest rate bed all together”. Given the US Federal Reserve’s balance sheet run-off and the European Central Bank’s expected taper by end of 2018, global liquidity will turn from an expansionary flow to a contractionary flow by Q4 2018. “We’re going to continue to see volatile days”, said JJ Kinahan, chief market strategist at TD Ameritrade. In a normal environment, stocks don’t normally rise when bonds do, and bonds would normally be priced lower when economic news is positive.

New York Federal Reserve President Bill Dudley told Bloomberg News on Thursday that if the USA economy keeps getting stronger the central bank may be justified in raising rates four times this year.

Fed speakers will get a lot of attention Thursday.

Stock markets slump as rate fears spread

Bill Gross: a turning point for bonds
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