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WTF? Bonds Global Sell-off

Yeah, we don't know either.

Global bonds sell-off

It isn’t just the US that is confused by the economy, stocks and bonds and consumer spending. A global sell-offs in bonds has pushed borrowing costs to near 20-year highs: The yields on US 30-year Treasuries shot above 5% and the German 10-year yield passed 3%.

On one hand, higher rates was the whole point of the exercise, the Fed has been raising rates for 18 months to slow the economy to get a hold on the inflation. The rub is that the maneuver generally requires the pressure to be slow and gradual – sudden movements are the sort of thing that causes markets to break-down. Which is why that recent jump in long term yields, after the Fed had more or less signaled that it was done raising rates has been so confounding.

Bonds and stocks generally act with a negative correlation – with the prices moving in different directions. That isn’t holding true this time; Bond prices have fallen, driving up the yields, as the S&P500 has shed 8% in value, and the dollar has gained 5%. One theory is that weirdly strong consumer spending and brighter growth expectations have led investors both at home and abroad to reduce demand on US Treasuries, which are used as a hedge against economic downturns. Investors are generally betting that the Fed is done raising rates, now the mystery is how long they’ll stay at these elevated levels.

Another theory is that the term premium, what an investor demands to tie up money for longer, is going up – reflecting uncertainty, but not necessarily gloom. And the possibility that rates haven’t been high enough long enough to dent consumer spending. Again, mixed signals: the run up in yields has pushed mortgage rates to a 23-year high with more lenders quoting rates at about 7.5% for a fixed 30 year. On the other hand, a strong September employment report could add to bond prices dropping further and picking up more yield.

Another theory – and a much simpler one – is that publicly held US debt has doubled in the last eight years – to an eye watering $26trl and there is only so much debt that global investors can absorb.


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