In the $23 trillion US Treasury bond market, a traditional economic alarm is getting louder and louder, yet Wall Street is a bit overwhelmed.
With the spread of the coronavirus delta variant, real yields in the US and Europe have both reached record lows over the past week, which is often seen as a warning that global economic recovery is under threat.
However, given that the Fed buys 120 billion US dollars of bonds every month, data and market trends are distorted due to the pandemic, and other technical factors, even Federal Reserve Chairman Jerome Powell is unable to figure out what is actually happening in the US treasury bond market these days.
More importantly, after the release of the better-than-expected US employment report, market sentiment began to improve and interest rates began to rise again. The yield on 10-year inflation-protected treasury bonds reached a low of -1.22% this week, but rebounded to -1.05% on Friday.
Bank of AmericaIt's hard to understand with Saxo Bank.BlackRockThe fund manager sees this as a reminder to rethink inflation. However, investors in the Medolanum International Fund believe that this is a good sign for the stock market, even if the valuation is high.
“When and how to resolve the extremely negative real yield mystery could have a significant and wide-ranging market impact,” said Athanasios Vamvakidis, head of foreign exchange strategy at Bank of America G-10.
The inability to interpret the latest meaning of yield is an unsettling state of affairs for policymakers — they have always viewed indicators such as sovereign debt trends and “Dr. Bronze” as economic weather vane.
Furthermore, it also increases the risk for fund managers. They have invested heavily in growth-sensitive assets, from cyclical stocks to high-yield credit.
“Financial suppression”
James Athey, investment director of Aberdeen Asset Management, said, “Today's real yield level is largely due to financial suppression,” and the decline in nominal interest rates is a key factor. “The whole market has been so distorted that everything needs a dose of powerful medicine.”
According to Bank of America's Vamvakidis, the mystery is that real yields have continued to fall this year despite the beginning of a global recovery.
Of course, the signals that bonds send do not match economic growth forecasts, and that increased risk is a characteristic of the post-financial crisis era, has prompted many to ignore their correlation in predicting consumption and investment cycle prospects.
“This year has shown that using the financial market as a predictor of the real economy can easily fall into a cycle of generalization, misjudgment, and feedback,” said Jamie Stuttgart, head of global macro fixed income at Robeco. He increased his bets on Europe's steep yield curve to benefit from economic growth.
Regardless of the real economic signal, one thing is certain: the actual level of return is critical for investors. Since investing in government debt may be discounted, fund managers have been investing in riskier assets to obtain higher returns, driving a sharp rise in cross-asset valuations.