The biggest threat to global stock markets in 2017 is a Bond Market Collapse. Or is it?
Former Federal Reserve Chairman Alan Greenspan warned in an interview with Bloomberg News on 1 August 2017; “By any measure, real long-term interest rates are much too low and therefore unsustainable”. He went on to explain, “when they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”
His comments were echoed by a few prominent analysts who share the same concerns. Binky Chadha, the Chief Global Strategies at Deutsche Bank AG believes that real, inflation-adjusted, yields on US Treasury debt is far below what actual growth levels would warrant. Tom Porcelli, Chief U.S Economist at RBC Capital Markets (Royal Bank of Canada) believes it’s only a matter of time before inflationary pressures eventually strike the bond market.
It isn’t a view that is widely shared, with many believing the bond market can easily withstand incremental increases in interest rates over time. That said, in the last week of July 2017, long term Treasury bond yields fell with the 30-year bond yield hitting 2.682%, its lowest level since November 2016. The benchmark 10-year note yield meanwhile reached 2.121%. Basically, the short and long-term rates have moved closer together. Long term bonds falling and short term rising.
There is a ‘trusty gauge’ that can sometimes predict US economic downturns, the ‘flattening of the Yield Curve’ within the Bond Market is an indicator that many investors watch, and although it may not be signalling that a recession is imminent, it does represent an area that needs to be closely watched as a flatter yield curve can hurt bank profits, stability and the overall willingness to lend money.
This article is written by Economist and Author Jodie Nolan. You can receive her eBook Surviving The Storm for free with our 1, 2 or 3 year subscription. Surviving the Storm is an easy to read e-book that provides a very real account of money management in today’s world
