Keep an eye on US ten-year bond yields in 2018
The structural decline in US ten-year bonds from 15.8 per cent in 1981 to 1.3 per cent in 2016 has seen both record lows and generational lows. Others include 4.7 per cent in 1830, 2.8 per cent in 1900 1.7 per cent in 1945.
While we are likely to see higher interest rates over the medium term, based on these previous troughs, the transition from falling to sustainably rising interest rates often takes some years to play out.
Generally, the relationship between the US ten-year bond yield and the US equites market, as represented by the S&P 500, have moved in the opposite direction, there have been periods where this has not held true.
Bonds are a claim on a stream of coupon payments that is fixed in nominal terms. Ordinarily very low bond yields imply a weak economy, low inflationary expectations and pressure on corporate earnings. Quantitative easing has changed that, particularly given the indications of synchronised global growth. As noted here.
Around US$8 trillion or 17 per cent of the US$48 trillion of the global Sovereign Bond market are currently trading at negative yields.
While the positive relationship between US ten-year bonds and the share market tends to occur when the yield is sub 4 per cent, investors should become more cautious if we witness a move above 3 per cent – a move we believe to be quite likely in 2018.
And the imminent approval of the Trump Tax Agenda – cutting the US corporate tax rate to 21 per cent – will likely see a boost to growth and inflationary expectations.
Around US$8 trillion or 17 per cent of the US$48 trillion of the global Sovereign Bond market are currently trading at negative yields. Should investors be cautious in 2018? Share on X
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
