2018/04/21 WEEKEND: Bond Blowup?
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WEEKEND: April 21, 2018
Bond Blowup?
No, not THAT Bond. Yet there is a sense that US government bond market might be blowing up at present. Is this the major meltdown that has been anticipated for so long? Like the rhetorical question title of our Another China Syndrome? post last Tuesday (as in will the US-China tariffs tiff turn into an economic meltdown?), this is NOT as likely as some would suggest. Is further weakness of US government bonds likely on the back of higher yields that reach multi-year highs? Yes. Yet the issue of how aggressive that trend will be, and especially whether there will be any extensive acceleration, is much more problematic.
That is because while the US remains a bastion of economic strength at present, there is an unseemly weakening of European and UK economic indications. That speaks of a need for a still accommodative ECB and somewhat less hawkish Bank of England activity that might restrain long-term bond yields. It is very apparent in the classical activity of US long-term fixed income leading the way down, and the European govvies following later in the cycle as US strength foments more aggressive global growth. UK long-dated fixed income tends to track somewhere in between, as is the case now. We will revisit the specifics of the US and European govvies trends below, including graphical analysis.
Yet initially it is productive to review the drivers for these divergent trends that allow the US govvies to lead the way down, as seen late last year into January and again at present. The first is last week Tuesday’s OECD Composite Leading Indicators (our mildly marked-up version) that highlighted continued growth elsewhere but extensive reversal of recent economic strength in Europe. The critical importance of that is twofold. The first is the degree to which previously still weak Europe had seemed to join the global economic expansion. The second complementary aspect is the degree to which ECB president Draghi’s inclination for continued accommodation now seems justified. And that points to enough liquidity provision to also potentially buffer any weakness in other long-dated government bond markets… potentially spilling over into the US.
And that is only the tip of the weakening European economic iceberg…
Authorized Subscribers click ‘Read more…’ (below) to access balance of the discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review options. As Market Observations (lower section) remain the same as our Commentary: Another China Syndrome? post updated Monday, there is no Extended Trend Assessment.
