Just a timely reminder that in markets nothing is ever entirely one-way .....
ref :- "Biggest Bond Rout in Years Whiplashes Bulls Who Were Right" , Bloomberg Markets
Does anybody really think that there has been some fundamental shift in the drivers of bond markets over the last 24 hours or so ? As if we needed any reminding, global bond yields have been tumbling (and global bond prices been surging) to such an extent that holders of US debt for example made 3.4% in August alone. The iShares long-bond ETF rose by 11% over the month for the best return for any month for 8 years. Who cares about about ultra-low yields when all you have to do is buy the things and watch the price rise ?
If you ever find yourself thinking that way, give yourself a sharp slap around the chops or take a cold shower, or do whatever it is you do when you need a wake-up mechanism .... because you could be one those who would care if you'd taken a quick punt on the long side of bonds on Wednesday afternoon, for example.
*** REMEMBER OF COURSE THAT AS BOND PRICES RISE, BOND YIELDS FALL .... AND VICE VERSA ***
Yesterday, the yield on the US Treasury 2yr note rose as much as 14 basis points at one stage (it finished up 11bp). That was the largest one-day rise in a decade. That iShares ETF dropped 2.4% in value. In Germany, 30-year yields managed to make a brief foray into positive territory after a month below zero. So what happened to cause such a roadbump on the seemingly uninterrupted road to lower yields and higher prices ?
Actually, in the greater scheme of things, not too much. You have to remember that any market where so many investors are loaded to one side is vulnerable to knee-jerk reactions when suddenly confronted with information that would seem to point the other way, especially in nervous times like these. Nevertheless, some better news regarding the biggest issue affecting the global growth picture -- the US / China trade dispute -- was the initial catalyst for the day's action. The two sides announced that talks would resume in early October. Anything that hints at an improvement in the relationship between the two sides, and therefore an improvement in the prospect for growth has the effect of pushing yields higher. Of course, we're all cynics by now, and one could easily argue that the parties concerned (or at least one in particular) have a habit of changing course without notice, so all such developments should be taken with a pinch of salt .... but that's another matter,
There were other factors behind the move .... data from the US services sector came in some way above estimates, and a spate of corporate bond issuance also helped to drive yields higher. As yields on US Treasuries have been falling, they drag the yields on corporate bonds down with them, and it's hardly surprising if companies want to take advantage by borrowing more whilst they have to pay so little for it.
But .... if you have to be careful about not preparing for the possibility of painful reversals in trends that appeared only likely to keep heading in one direction, you also have to be careful about reading too much into a small set of data (and of course about investing too much faith in unpredictable politicians). By the time many of you read this, we will have seen the US employment data for August and yesterday's news could be redundant. Expectations are :
Non-farm payrolls : + 160,000
Ave, Hourly earning : +3.1%
Unemployment rate : 3.7%
Fed Chairman Powell also speaks in Zurich later -- for the last time in fact before all members of the Fed go into self-imposed silence ahead of the next rate decision on Sept 18th. A cut of 25bp is all but guaranteed and markets are sure that there will be at least one more before year-end, but Mr Powell's words will be scrutinised for an indication of the Fed's current thinking .... which, let's face it, hasn't generally been as dovish as the market's in the past.
There's a view that with central banks around the world easing monetary policy and global headwinds (including the trade dispute) undermining expectations, it's unlikely that Treasury yields can rally much from here, despite yesterday's little shock. That's fair enough ... but remember, nothing's written in stone .