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? Click To Tweet