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World bond market rout pauses as yields pull back from highs

World bond market rout pauses as yields pull back from highs

But either way, it is because of the anticipation of inflation that is giving rise to yields.

The U.S. dollar rose against a basket of currencies as the U.S. bond market selloff leveled off. In Asia on Monday, Tokyo dived 2.6 percent, while Hong Kong sank more than one percent and Sydney closed down 1.6 percent. Now if you reverse PE (i.e. 1/24.53 or 4.07 per cent), you get what is called the earnings yield. The bond yield/equity yield or BEER ratio at 1.85 makes equities look overvalued.

Stock markets were routed around the globe on Monday, with European indexes opening lower and bond yields rising as resurgent US inflation raised the possibility central banks would tighten policy more aggressively than had been expected. And the more bond yields rise, the more will be this opportunity cost. The yield is now the highest it's been since January 2014. The market hasn't gone through a 10 percent drop since early 2016, when oil prices were plunging as investors anxious about a drop in global growth that would hurt demand.

United States and German 10-year bond yields hit fresh multi-year highs in early European trade on Monday.

After regular trading hours on Monday, S&P 500 E-mini stock futures rose 0.73 percent, suggesting some traders expect Wall Street to open with a gain on Tuesday. Inflation here we come! The theory is that the fresh flood of money would make it easier for companies to raise capital, invest in their businesses and hire workers.

Since stocks began climbing during the depths of the Great Recession in 2009, their rise has been supported by some of the lowest global interest rates seen since World War II.

"We needed this", says Michael Franzese, head of fixed-income trading at MCAP LLC, a broker-dealer.

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"Overall, we are not convinced that this is the start of a major correction in the stock market, as the fundamentals remain healthy for now", he said.

Investors have grown increasingly anxious that a rapid rise in interest rates, spurred by higher inflation, could derail the market's strong and calm ride upward.

One of the changes that one would have thought would have induced the Fed toward a more aggressive monetary policy stance than it has been pursuing has been the strong increase in USA stock market prices. A stronger economy generally strokes inflation. Inflation expectations are what is driving central banks' decisions, and in turn is what drives rates - so talk about global growth and inflation rising is starting to drive up real rates/yields and that is coming to haunt equity investors. Such purchases increased faster in the second half of a year ago than in any six-month period since 2014.

Managers have cautioned the sell-off in bond and equity markets has further to run, pointing to the impact of the withdrawal of central bank stimulus and even a potential stagflationary environment developing. While viewed by many as a handy way of gauging relative value, corporate earnings and bond yields aren't the same - they move with different volatility and different sensitivity to inflation.

"We have seen the US Fed warning the markets that it would be raising interest rates". The Fed is then likely to raise the key short-term rate it controls to help reduce borrowing and spending and hold inflation in check. That augurs for a gradual and limited rise in interest rates, rather than a disruptive change.

However, rising bonds does not always lead to poor equity performance. It's up 3.3% for the year.

Energy firms across Asia were sharply down as crude tanked on the back of news that USA drillers brought more rigs back online to take advantage of a recent rise in prices. United Kingdom government debt is also under pressure, pushing up yields to the highest level since May 2016.


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