Is a US bond market crash a realistic scenario?
By Vincent-Frédéric Mivelaz
Since the recent US government bonds yield hike of last week (2-year government bond rates reaching above 2%, a 10-year high) and the market excitement that followed, coupled with possible Japanese and European central bank policy tightening, we might wonder whether we can expect an imminent US bond market crash in the next couple of days! All the ingredients are there: a sudden US government bond rate hike increase, equity markets constantly going up (hypothesis: the propensity of investors to take further risk for higher returns pushes bondholders to invest in equity markets), the timing of policy tightening can become unpredictable.
From our perspective, Friday, January 12th, 2018 moves on the bond market were strongly influenced by December US core CPI growth (above expectations at 1.80%), coupled with strong monthly retail sales data (0.4%, in line with the consensus) that signify faster-than-expected Fed policy tightening. Looking at the US 10-year and 2-year yields, we remain confident that as long as the yields range around 3% and 2.50% respectively, the US bond market remains stable. We think that the US bond market conditions should be interpreted as positive and indicate that the US economy is growing at an active pace. In any case, further rate hikes will expose the US government to higher interest rates, bearing in mind that the US government carries a national debt of USD 20 trillion that would remain expensive in the longer term.
UK inflation figure to go unnoticed as investors focus on negotiations
By Arnaud Masset
After printing a new multi-month high on Monday, the pound sterling has stabilized gains at around $1.3785. Since the beginning of the year, the pound sterling and the single currency have been moving side by side, suggesting that the market was more focused on the Trump situation than the UK/EU divorce. In our opinion, Brexit risks are currently underestimated and investors seemed to have forgotten that the EU has the upper hand and is currently taking a tougher stance on transition talks.
December inflation figures are due for release this afternoon. No major surprise is expected: the headline measure should ease to 3% year-on-year from 3.1% in November. The core measure, which excludes the most volatile components, is anticipated to come in at 2.6% year-on-year, down from 2.7%. Despite the improving inflation outlook, there is little chance that the BoE will step in any time soon as only two to three hikes are expected over the next 36 months. Therefore we remain cautious regarding further GBP appreciation.