Fra Zerohedge
Monday started off where Friday left off, with the global reflation/stagflation trade in full swing as the dollar surge continues, pushing the DXY above 100 for the first time since December, global bond yields soaring, emerging market currencies tumbling, and the Yuan slammed below 6.85 for the first time. However, where Monday is different is that while European stocks and US index futures started off far higher, E-minis have now faded the entire overnight rally and are now red for the session, on concerns that the spike in yields will cap any more stock upside.
The Bloomberg Dollar Spot Index jumped 0.7 percent, rising for a fourth-straight day, and set for the largest gain over such a period since 2009.
As the dollar surges, emerging markets are getting crushed again and the MSCI Emerging Markets Currency Index slid 0.2 percent, extending last week’s 2.27 percent drop, the deepest five-day loss since June 2013. The lira and Hungarian forint tumbled more than 0.9 percent.
However, while market cheerleaders will point to the imminent new all time highs in the DJIA, it is the rout in bond markets that is the real story as both UK 10Y gilts, Spanish 10Y and Italian 10Y bonds all plunging by the biggest intraday amount in almost a year. As Bloomberg notes, the global bond rout is intensifying, sending U.S. 30-year yields above 3 percent for the first time since January, and the 2-year yield above 1% for the first time since January on speculation that inflation will quicken as Donald Trump tries to increase spending to boost the world’s largest economy.
“Yields will continue to rise over the next year,” said Hiroki Shimazu, an economist and strategist at the Japanese unit of MCP Asset Management in Tokyo. “The fundamentals are very strong, particularly in the U.S. There are some signs of higher inflation pressures. Trump is pushing this phenomenon.”
Benchmark German 10-year bonds headed for their longest losing streak since May, and those on similar-maturity Italian debt climbed to the highest since July 2015. U.K. 10-year gilts extended their slide to a sixth day, pushing yields to a five-month high. Portuguese yields rose above 3.6 percent for the first time since October. Since the Nov. 8 election, developing-nation local-currency bonds tumbled 7.3 percent through Nov. 11, the biggest three-day slump since October 2008. The decline cut the bonds’ return this year to 8.5 percent.
Thirty-year bond yields climbed six basis points, or 0.06 percentage point, to 3.00 percent as of 10:08 a.m. in London, and earlier touched 3.03 percent, based on Bloomberg Bond Trader data. The 2.875 percent security due in November 2046 fell 1 3/32, or $10.94 per $1,000 face amount, to 97 21/32.
Government bonds also extended losses across the Asia-Pacific region. Thailand’s 10-year yield jumped by the most since May after foreign investors pulled a record 27 billion baht ($763 million) from the nation’s bond market on Friday, while similar-maturity debt in China dropped for a seventh day, the longest losing streak in three years.
“Trump has introduced so much uncertainty — around the fiscal outlook, the outlook for foreign demand for Treasuries given his protectionism and his views on China, uncertainty around the outlook for the Fed,” said John Davies, an interest-rate strategist at Standard Chartered Plc in London, which adjusted its forecast for 10-year Treasuries yields to 3 percent in the end of 2017 from below 2 percent previously. “There’s an uncertainty premium, rather than just expectations of much more Fed tightening,” being priced into Treasuries, he said. “We think there’s room for this to continue.”
U.S. 10-year note yields jumped seven basis points to 2.23 percent. The selloff wiped a record $1.2 trillion off the value of bonds around the world last week when Trump was elected U.S. president. Investors rotated into stocks, as global developed-market shares beat investment-grade debt by the most since 2011 amid concern the stimulus will stoke inflation and lead the Federal Reserve to raise interest rates. Pacific Investment Management Co. said the central bank may move three times by the end of 2017.
“Yields will continue to rise over the next year,” said Hiroki Shimazu, an economist and strategist at the Japanese unit of MCP Asset Management in Tokyo. “The fundamentals are very strong, particularly in the U.S. There are some signs of higher inflation pressures. Trump is pushing this phenomenon.”
The move marks a reversal from four months ago when benchmark Treasury yields fell to a record low of 1.318 percent. “Long-term interest rates seem to be bottoming out,” Pimco, which runs the world’s biggest actively managed bond fund, said in a post on Twitter Nov. 11.
As Goldman and Deutsche Bank both warned on Friday, keep an eye on yields: while it is unclear what the level is, with GS expecting around 2.50% while DB suggesting “somewhere around here”, the US 10 Year will soon reach that level which makes further equity gains impossible due to both concerns imminent Fed rate hikes will tighten financial conditions, while growing fears that inflation will sap corporate profits will likely also result in equity selling in the near future.
