Investment Insights: What’s got bond markets in a huff?
This weekly report presents insights from our Global Investment Management team.
Bond prices fell on Monday as global central banks could be moving toward tightening – or at least less accommodative – monetary policy, a move that echoes a similar shift made by the Fed years ago.
The 10-year Treasury yield jumped 0.12% and ended the day at 2.96%. Most of the advance was from reports that the Bank of Japan may reduce its massive bond-buying program, a policy change akin to the tapering of quantitative easing by the Fed. Just as the “taper tantrum” spooked investors after the Fed’s announcement, markets had a similar reaction this time around. Japanese government bond yields rocketed upward from 0.03% to 0.08%. While these bond yields are quite low, the relative change was substantial. The 3% mark for the 10-year Treasury continues to be a psychological threshold for investors as they come to grips with a long-awaited normalization in yields following a 30-year bull market in bonds and ultra-easy monetary policy in the fallout of the Great Recession.
Even the rise in geopolitical risk hasn’t been able to keep a cap on the upward move in yields. A rising dispute between Iran and the U.S. is now in the limelight, as both leaders publicly announced threats of retaliation over earlier verbal intimidations and the potential block of oil exports. President Trump mentioned yesterday that the U.S. is open to negotiating a new nuclear deal with Iran. The intensifying trade war with China also continues to be a risk for markets; however, both the U.S. and China have been recently hinting they are open to restarting talks. This likely came as a surprise to investors after President Trump told CNBC last week that he was “…ready to go to 500,” referring to taxing all goods imported from China. While China may be running out of ammunition due to the much lower amount of goods imported from the U.S., currency may be the next battlefront for the two nations if no resolution is reached.
Stock markets remain fairly positive in light of the potential changes in monetary policy and geopolitical risks. Corporate earnings continue to be supportive and a bright spot for financial markets. So far, 146 of the companies in the S&P 500 have reported earnings, and all but 12 have exceeded their estimates, according to data aggregated by Bloomberg. Growth in earnings continues to be on track to exceed 20% this quarter and may even surpass the extraordinary numbers we saw last season. This is one of the most important weeks for this earnings season, with 175 companies reporting, including Facebook, Google/Alphabet, and Amazon.
The Global Investment Management team continues to see some upward opportunity for U.S. stock markets as long as earnings reports remain on their current trend. While our team does see heightened geopolitical risk presently, there seems to be a prospect for negotiation on the horizon – Trump will speak with the European Commission today to discuss trade levies. However, it’s important to remember that political situations such as these are always highly fluid. We believe the jump in interest rates was largely transitory, but rates are likely on an upward path over the longer term.
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Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
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