Commenting on Friday’s jump in global bond yields, a fund manager on Bloomberg Television downplayed the move: ‘Yields are back to where they were last week.’ Such thinking badly misses the point.
Greed and Fear ensure that markets have an inherent tendency to ‘overshoot.’ Over-liquefied markets can significantly overshoot on the upside. Markets for years dominated by ultra-low rates and massive central bank buying should be expected to overshoot in historic fashion. And that’s exactly what has unfolded. Major market Reversals tend to be violent and unpredictable affairs, catching almost everyone unprepared.
At the minimum, summer complacency ended rather abruptly Friday. Bloomberg: ‘Stocks, Bonds Spiral Lower Together in Replay of Past Hawk Raids.’ Long-bond Treasury yields jumped 13 bps Friday, with a two-day surge of 20 bps (‘biggest two-day rise since August 2015′). Ten-year Treasury yields rose seven bps this week to the highest level (1.67%) since June. German 10-year bund yields rose 13 bps (‘biggest slide since March’) in two sessions to the first positive yield (0.01%) since July 15.
September 8 – Bloomberg (Kevin Buckland, Wes Goodman and Shigeki Nozawa): ‘One of the pillars of 2016’s record-setting global bond rally is starting to buckle. Japan’s sovereign debt is suffering its worst rout in 13 years, handing investors bigger losses over the past two months than any other government bonds amid speculation the Bank of Japan plans to change its asset-purchase strategy. The reversal is spurring concern the second-largest debt market is the vanguard for a broader selloff… The impact of the BOJ’s stimulus is that the bond markets worldwide are becoming one market,’ said Chotaro Morita, the chief rates strategist at… SMBC Nikko Securities Inc., one of the 21 primary dealers that trade directly with the central bank. ‘If there’s a reversal of policy, you can’t rule out that it would roil global debt.’
This post was published at Wall Street Examiner on September 10, 2016.
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