By DAR Wong
On the 24 April, US 10-year bond yield reached 3 percent for the first time since 2014. Market investors became worried and Dow Jones benchmark fell more than 400 points on that session. The following morning, all Asian stock indexes declined while the Dollar Index rose more than 1 point to almost 91.00 region.
What does it mean for the market after seeing the rise in 10-year Bond yield to 3 percent? Literally, many analysts are calling that the snowball would roll down soon on the stock markets, with expectations that there could be another 4 to 6 rate hikes by the Federal Reserve. Generally, we would outline some whiplash effects from the rising Bond yield that has been witnessed in many economic cycles in past decades.
To begin with, the US 10-year note is used generally as a benchmark to set as a borrowing cost for mortgage rate worldwide. Therefore, the ascension in the borrowing rates would indicate a forthcoming rising cost for all property buyers and hence all those sitting on loans. In other words, property prices will be covered with a cooling blanket worldwide starting from now.
As the yield of 2-year note has also risen to 2.5 percent, the yield curve has begun to flatten with short-term rates rising faster than long-term rates. Fundamentally, this means that investors will prefer to invest over 1 to 2 years instead of 5 years; or putting money in a 10-year Bond since the yield is not too far away compared to a 30-year Bond. Theoretically, a flattening yield curve indicates an impending recession to come due to slowing economic activity. As market liquidity straps down, equity markets will be the next sector to be spanked with flight-out-fund.
Since the 2008 crisis, we have seen very low interest that is near to zero level in U.S. markets. American policymakers began to call for “normalising rate” since end 2015 and has gradually tiptoed its way to higher rates untill Obama stepped down. After President Trump was elected, the controversial President is betting heavily on economic stimulus and has called for the US to go on infrastructure spending spree, which is expected to stoke inflation. As a result, interest rates will be expected to rise in tandem throughout his presidential term. Literally, a rising Bond yield means more room for rate hikes and policymakers are prepared to build up higher FED fund rates to capture fast growing economy!
Nevertheless, the current doldrum in U.S. economy and the resurgence of Europe debt crisis might be hard for the target inflation to stoke in growth. Hence, a high interest rates that lead to piling borrowing cost across the markets will only lead to a possible crisis that will soon mature within 9 to 18 months.
In May, the Dollar Index (USDX) has surged to 92.00 level, though resistance is seen at this region. After President Trump announced the withdrawal of the US from the Iran deal on 8 May, it is hard to imagine if oil prices will begin to rise soon due to global supply cut in tandem with strong Dollar. The rampant inflation has quickly pricked the bubble in Argentina and bludgeon the Peso for more than 18 percent shortly over 2 weeks. In our opinion, the US Dollar has to begin recede in due course in order to prevent triggering crises in many developing economies!
With the rising uncertainties and scepticism in global financial markets, you should exercise more caution in your investment strategy and restrict to short-term position with uncompromised risk control. Ironically, the potential profits in the market will lie in those instruments that common folks could not see now!
~ DAR Wong is a registered Fund Manager with 29 years of Financial market experiences on global basis. The expressions are solely at his own. He can be reached at firstname.lastname@example.org