US 30-year yields are flirting with the 5.10% area. Even in Japan, 30-year yields have surpassed the 3% level.
Bond markets are on fire again all around the world.
Let’s make things clear: this is not about the US only, it’s about a bunch of countries acting as the US does.
Here is the unfriendly policy mix that long-end bond markets are hating:
1. Core inflation above target
2. Central Banks communicating a dovish stance with forward rates below neutral
3. Governments loosening their policy stance with fiscal deficits
On top of this, there is also a demand/supply imbalance emerging.
Fiscal deficits expand the supply of bonds, and the marginal buyer is now asking for a higher compensation (higher yields) to take on long duration risk given the cocktail above.
The chart below shows the YTD increase in 30-year yields (in bps) for a basket of countries behaving as described above.
US, Japan, Canada, Australia and the UK are all embarking in looser fiscal policy with core inflation above target and their Central Banks keep having a proactive dovish stance.
Do you think the bond market will continue revolting until governments and Central Banks adjust their policies?
***
Disclaimer: This article was originally published on The Macro (BCBA:BMAm) Compass. Come join this vibrant community of macro investors, asset allocators and hedge funds - check out which subscription tier suits you the most using this link.