Readers will know that we have been expecting a scary steepening of the bond curve. The reasons are clear. The global vaccine recovery has begun. Central banks have nailed short-end yields to the floor. Fiscal stimulus is booming. There are short-term inflation pressures in the global inventory rebuild and production bottlenecks. Energy prices are surging. And there are very favourable base effects for higher inflation for months to come.
That back-up in yields is really gathering steam. Just about everywhere:
The US is leading. Markets there are beginning to price out dovish Fed rhetoric:
It is on track to match the 2013 “taper tantrum”:
And has further to go:
Which brings me to the point of this post. We know that China is the leading indicator of this cycle. It was first into the virus and first out of it via stimulus measures. Now it is the first to tighten. Its yields have been backing up for months, driving CNY higher with capital flows. But that yield advantage has now rolled over versus the US:
The same is the case for the US and Europe. The US is far ahead of Europe on the vaccine rollout, indeed the latter is bizarrely slow:
And relative growth expectations have also rolled:
Remember that it is this dynamic and the stronger EUR that results that plays a crucial role in delivering early cycle “reflation” falls in the US dollar. Yet the US is headed for materially stronger growth, higher inflation and higher yields than Europe is.
Add that Chinese tightening will begin to bite in H2, and CNY come under pressure as growth and inflation begin to fall back, and we have a clear case for a stronger US dollar before very long. This is even more so given how overbalanced towards US dollar shorts the market is positioned in.
If so, that will end the “commodity supercycle” rhetoric that is suddenly so popular and sink the Australian dollar before very long as well.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
Perhaps it’s only good for selected stocks…? Energy seems a good play, perhaps?
On the other hand, surely the USD can’t run too far, as yields picking up in other nations would put a cap on the USD, in the context of genuine and significant economic activity?
General question from an abject ignoramus w.r.t bonds. Is it possible to be on the other side of bond yield increase, ie shorting the capital component of bonds? How would that be done at a retail level.
Not sure if you have your wires crossed swampy.
Bond yield increase = falling bond price
If you are taking the contrary position to bond yields increasing you would simply…. buy a bond. It’s price will go up as yields fall.
bond yields are not surging because of surging energy prices nor global bottle necks – your graphs EXPLICITLY show they were surging well before any vaccine roll out or recovery – its just flat out untrue.
They are surging because of massive QE flooding the western system with funny money – and absolutely every single man and his dog knows that – literally EVERYONE knows this is why and no one thinks its because of rampant energy prices.
China did not surge because of its stimulus either – China surged because the entire western manufacturing sector basically shut down and collapsed while China supplied the entire planet – again – this is not something that is up for debate, its not a question its a universally accepted global economic fact.
We KNOW full well exactly where China’s stimulus went – and always it goes in infrastructure – same everytime – I understand its hard for this website to accept that China delivers stimulus via keynesian easing while the west delivers in the expansion of wealth inequality via exploding asset price via QE – but as hard as that maybe to accept its still a basic universal fact everyone on earth pretty much accepts.
I really can’t fathom this refusal to accept basic reality.
Bond yields are screaming higher off the back of the TFF expansion – you can see it to the hour, minute, second it was announced.
‘
Very interesting.
How is this not bad for stocks in general?
Perhaps it’s only good for selected stocks…? Energy seems a good play, perhaps?
On the other hand, surely the USD can’t run too far, as yields picking up in other nations would put a cap on the USD, in the context of genuine and significant economic activity?
Bad for growth, good for value.
Value investing? Sounds like people would need to think about where they put their money – that’s terrible! 😉
Inflation in the US may force the Fed to start raising rates in Q3 2021. This will also cause AUD to drop.
General question from an abject ignoramus w.r.t bonds. Is it possible to be on the other side of bond yield increase, ie shorting the capital component of bonds? How would that be done at a retail level.
Not sure.
Sophisticated traders probably have instruments for it.
For plebs, I’d say the US markets probably have some ETFs that do something like that, following some index of some sort.
Not sure if you have your wires crossed swampy.
Bond yield increase = falling bond price
If you are taking the contrary position to bond yields increasing you would simply…. buy a bond. It’s price will go up as yields fall.
If I have misunderstood your intent let me know.
Japanese carry trade for us
https://twitter.com/stirboi1/status/1363807073172127744
https://ycharts.com/indicators/10_year_treasury_rate
bond yields are not surging because of surging energy prices nor global bottle necks – your graphs EXPLICITLY show they were surging well before any vaccine roll out or recovery – its just flat out untrue.
They are surging because of massive QE flooding the western system with funny money – and absolutely every single man and his dog knows that – literally EVERYONE knows this is why and no one thinks its because of rampant energy prices.
China did not surge because of its stimulus either – China surged because the entire western manufacturing sector basically shut down and collapsed while China supplied the entire planet – again – this is not something that is up for debate, its not a question its a universally accepted global economic fact.
We KNOW full well exactly where China’s stimulus went – and always it goes in infrastructure – same everytime – I understand its hard for this website to accept that China delivers stimulus via keynesian easing while the west delivers in the expansion of wealth inequality via exploding asset price via QE – but as hard as that maybe to accept its still a basic universal fact everyone on earth pretty much accepts.
I really can’t fathom this refusal to accept basic reality.
Bond yields are screaming higher off the back of the TFF expansion – you can see it to the hour, minute, second it was announced.
+1 Yep
you make a great point.
+many
Agree. I think David is looking for complexity unnecessarily. Money printing suffices as an explanation.
And this is ‘why the Renminbi may be the last fiat left standing’
“It’s easy to be the last man standing – if all the others commit suicide”.
https://surplusenergyeconomics.wordpress.com/