BOND MARKET UPWARD MOMENTUM STALLED FOR THE MOMENT
Apparently financial markets have hit a lot of peaks this year — everything from monster year-over-year earnings, unprecedented fiscal and monetary policy support, and weekly stock market milestones. Corporate bond prices were no exception — leading to record low yields. But that trend has started to reverse course.
Euro zone government bond yields drifted sideways on Friday, with German borrowing costs holding above recent six-month lows in a sign that the rush to fixed income has abated for now. After tumbling almost 26 basis points in July in the biggest monthly fall in almost two years as global reflation bets turned tail, Germany’s 10-year bond yield has edged higher this month. An improving U.S. labour market and speculation the U.S Federal Reserve could soon start to unwind its bond buying stimulus have lifted U.S. and European bond yields. In the euro area, however, an expectation the European Central Bank will keep its hefty asset purchase scheme in place for some time to support growth and help boost inflation continues to underpin bond markets. So, European bonds have outperformed Treasuries, with the gap between 10-year yields in the United States and euro zone benchmark Germany widening to almost 183 basis points (bps) on Thursday, its widest since June. The euro area is lagging a bit in terms of the recovery and there is most likely an expectation that the rebound won’t be as strong as in the U.S.
U.S. 10-year Treasury yields are up 16 bps from six-month lows hit last week; Germany’s Bund yield is up 6 bps from last week’s six-month low of -0.52%.On Friday U.S. borrowing costs fell after consumer sentiment dropped sharply in early August, with the 10-year Treasury yield down 6 bps to 1.31%. Bund yields were steady at around -0.46%. Most other 10-year bond yields were also broadly unchanged.
Rising inflation expectations could most likely be explained by a view that supply bottlenecks caused by the COVID-19 outbreak would lift inflation in the short-term. Analysts said the key driver for bond markets remained the outlook for tapering by the Federal Reserve, back in focus after stronger-than-expected jobs data a week ago. majority of economists expect the Fed to announce a plan to taper its asset purchases in September. Short-term debt funds in India are attracting big inflows amid uncertainties over the central bank’s future policy stance.
Funds maturing in up to six months, including liquid and ultra-short duration funds, got the highest inflows in three months in July, swelling the total debt inflows to Rs 73,700 crore ($10 billion), according to the Association of Mutual Funds in India. Rising inflation is constraining the central bank from easing further even as the economy remains vulnerable following a deadly wave of coronavirus infections. The Reserve Bank of India last week left its key rate unchanged but one policy member dissented over maintaining an accommodative stance for longer.
Yields on those lowest-rated bonds have shot up over the last month. The "CCC rated and lower" segment of the ICE BofA high yield index is now yielding 7.4%, up materially from its record low 6.5% on July 7.That doesn't mean we're in for a massive market correction. Yields still remain low by historical standards. But it is a sign that market froth has receded from its sugar high. Bond prices can only go so high. Unlike stocks, which theoretically have no ceiling, companies eventually repay the money they owe to bondholders — but no more than that. At a certain point, the only direction bond prices can move is lower. We may have reached that point.
