Investors brace for more swings as U.S. inflation specter rises

Investors brace for more swings as U.S. inflation specter rises

Investors brace for more swings as U.S. inflation specter rises

The world has turned uglier for stock market bulls and leveraged bond market bulls are on the road to financial suicide, assisted merrily along by a fee-driven Private Bankerji.

Thirty-year bonds were last down 23/32 in price to yield 3.155 percent, after earlier rising to 3.167 percent, the highest since March 15. Similarly, between May 2003 and June 2006, the 177 bps surge in the UST 10-year yield failed to deter USA equities from notching up gains of 32 per cent.

"There's going to be an interplay, a bit of push and pull between the rates market and equity market", said Mark Cabana, head of US short rate strategy at Bank of America Merrill Lynch.

The equity market has become highly sensitive to inflation this month.

In light of Friday's strong U.S. jobs report, some analysts expect the Fed to offer as many as four modest rate hikes this year, starting in March.

"Equities are going to do this until they don't", said Art Hogan, chief market strategist at Wunderlich Securities.

Equity investors are anxious the likelihood of a stronger US economy and higher inflation could lead the Federal Reserve to boost interest rates more times than previously anticipated.

Dow Jones lost a jaw-dropping 666 points on Friday after 10-year Treasury yield rose some 2.8 per cent to hit the highest level since January 2014. In fact, the 10-year Treasury yield is up about 40% from September, when it was hovering around 2%. So US bonds yields are rising, giving equities a run for money. (Though there are several reasons to be cautious about the latest wage data.) That implies higher inflation, which is bad for bonds.

On Thursday, New York Federal Reserve President William Dudley said the central bank's forecast of three rate hikes still seemed a "very reasonable projection" but added there was a potential for more, should the economy look stronger. Central bank purchases in 2018 are on the decline to the tune of $1 trillion Dollars less in net purchases versus previous year. The 10-year was at 2.84 percent Wednesday afternoon, after edging to 2.86 percent, just under its high for the week of 2.88 percent. "It was a 2.75% yield that impacted stocks", he says.

"There is a lot of concern in the rising yield in the 10-year Treasury note", said David Kass, professor of finance at the University of Maryland. Vanguard's fair value model has the 10-year note between 2.75% and 2.8% for the year.

"The pace really does matter", said Ron Temple, Head of US Equities and Co-Head of Multi Asset Investing at Lazard Asset Management in NY.

Graham Bishop, Investment Director at Heartwood Investment Management, offered his thoughts on the state of the bond market. On Friday, a key gauge of global stock indexes was down more than 1 percent, while European shares ended down 1.4 percent. "The trade deficits are at record highs", Schiff said. He approved sweeping tax reform that cut taxes for businesses and most workers, but the U.S. Treasury is going to need to borrow more than $1 trillion to make ends meet this year.

And though the tumble in the S&P 500 may be nothing but a breather, concern is mounting that the Treasury market's travails are becoming an inescapable portent for stocks.

The next big test for the bond and stock markets could be on Valentine's Day, when the government releases its next monthly update on inflation.

But analysts also caution yields are not at levels that should be alarming to investors, and in fact are at levels that signal a healthier global economy, and the performance of some stocks this week points to a belief the consumer is also getting healthier.

As the thinking goes, higher interest rates will lead to tighter financial conditions, constricting the flow of capital, reducing the demand for equities.

"But it doesn't do much for predicting short-term moves".

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