Global stock markets selloff accelerates

Posted February 10, 2018

The average yield on the 10-year Treasury note over the past 30 years is 4.834 percent, still well above current levels. The S&P 500 did not fare any better.

Again, the comparison, a version of something known as the Fed model, isn't unanimously embraced by professionals. The bonds market rout has further added fuel to this speculation. They got a lot of steroids of liquidity and low interest rates and refinancing, whereby US Fed picked up every junk subprime loan in the market.

"The simplest way to look at it is, everything is relative". Many equity markets were already in negative territory last week owing to rising bond yields and profit-taking. Stronger price pressures can erode the value of a bond's fixed interest payments.

A related concept is net present value.

"Such easy monetary policy helps families and companies through lower borrowing costs, for mortgages and student loans, for example".

The CBoe Volatility index (.VIX) closed at its highest since August 2015.

Emerging market stocks lost 1.78 percent.

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During its recent rally, the domestic stock market was overlooking the rising bond yields on some "misguided view" about earnings and macro-economic factors being less relevant for the equity market against ample global liquidity, Kotak Institutional Equities said in a recent note. 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.

Wild swings over the past week have left stocks in the red for the year.

India, too, is witnessing a rise in yields on 10-year bonds, and the Dalal Street is feeling the heat.

But there's a point where the "signal" leaves the abstract and becomes a drag on earnings.

All major sectors were down Thursday, with technology, real estate and financials leading the plunge, signalling investor unease around interest rates and the prospect of higher inflation. Rock-bottom financing costs have been a boon to earnings for a decade, a period in which the Federal Reserve has held rates near zero.

Monday's historic slump in U.S. stocks had something to do with this. When bond prices go lower, their yield increases. "There is an emerging inflation story in the USA - and rising United States inflation makes monetary policy less predictable".

"The dust hasn't settled yet, and I think both buyers and sellers are trying to figure out what this market really wants to do", said Jonathan Corpina, senior managing partner for Meridian Equity Partners in NY.

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The Federal Reserve announced plans to reduce its $4.5trn balance sheet in October 2017, while the European Central Bank started halving its bond purchases from €60bn to €30bn-a-month in January.

Wall Street anticipates that more government spending will force the Treasury Department to borrow more money by selling additional bonds.

7-year -10 bps @ 2.665%. This is the worst drop seen by the tech index since February of 2006.

While US bond yields have been rising on expectation of faster economic recovery and a possible spike in inflation and thus interest rates, in India the sharp increase in bond yields over the past few weeks have been attributed to concerns over the government's fiscal slippage in FY18 and a higher-than-expected fiscal deficit target for FY19. All of that could result in a recession, which in the end is what most analysts say will kill the bull market.

Speaking at a fixed-income conference in January, Bob Michele, head of global fixed income, currency, and commodities at JPMorgan Asset Management, said investors could "see a significant bear market". The firm manages US$179 billion.

"The interest rates and volatility beach ball was suppressed under water, sat on by the 1,000-pound gorilla of the Fed, the ECB, and the Bank of England".

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