The US bond yields went up from 1.three to 1.73 % in a matter of three weeks. But now it has receded to 1.67 – eight foundation factors (bps) decrease from the latest highs. So, is the chaos or the volatility within the bond markets over? And how are monetary flows into rising markets (EMs) shaping up? Manpreet Gill, Head-FICC Investment Strategy of Standard Chartered Private Bank answered these questions.
“We have seen a little bit of pullback and it has been nice. But arguably you could attribute some of that to positioning having become lopsided but there are still some fundamental questions ahead of us on the inflation side,” he stated.
Gill believes there isn’t any purpose for Powell to react to rising bond yields if the economic system is doing okay.
“What still stands out to us is Jerome Powell, unlike the ECB, did not try to lean strongly against the rising bond yields. There is no reason for them to do so if the economy is doing okay, corporate bond markets are doing okay, and the dollar hasn’t surged in a very big way. The bulk of the move might very well be behind us but if you are looking at inflation and growth creeping back towards the 2 percent range, that is where – because the yields around where they are – potentially another 10-50 bps higher doesn’t look unreasonable. It is quite possible we will see markets test how far the Fed is willing to allow this to go,” he acknowledged.
Vaccinations in opposition to COVID-19 are accelerating quickly within the US, resulting in elevated inflation expectations, he stated.
In phrases of flows, he identified, “Flows have been fairly tentative day-to-day and week-to-week foundation, relying on the US greenback as a result of going into the 12 months that’s one key assumption throughout the market that we’re going to get a weaker greenback and that’s often nice for EMs.” There is a few sensitivity on that entrance, nonetheless, it’s arguably lesser than what one would count on in fairness and bond markets.
Considering the larger context, Gill believes the greenback rebound has been fairly small.
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