The Tell-tale Sign of U.S. 10-Year Bond Yield
On the 24 April, U.S. 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. On following morning, all Asian stock indexes declined while the Dollar Index rose more than 1 point to almost 91.00 region.
What does it really mean for the market after seeing the rise in 10-year Bond yield to 3 percent? Literally, many analysts are calling for the tip of snowball to roll down soon on stock markets while others forecast another 4 to 6 rate hikes will be expected in U.S. Federal Reserve. Generally, we would outline some whiplash effects from the rising Bond yield that has been pictured from many economic cycles in past decades.
First of all, the U.S. 10-year note is used generally 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 those sitting on leveraged loans. In other words, property prices will be engulfed 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 when the yield is not too far away from 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” from end 2015 and gradually tiptoed its way to higher rates till Obama stepped down. While President Trump calls widely for an inflation rise and widespread infrastructure to be built for coming years, interest rates will be expected to rise 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 economic 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.
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 email@example.com
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