10 Year Rates Rocket on inflation fears
Bond Yields are going higher and fast. Since January bond yields have increased across the board, rising quickly in the USA, Australia, New Zealand and Canada especially.
Economies are rebounding and looking to show significant GDP growth during 2021 thanks to the rollout of the vaccine and reopening. This growth may (In the case of the US) be fuelled by additional fiscal stimulus but is certainly being underpinned by monetary stimulus which kept rates low during 2020.
The rise in bond yields can be attributed directly to investors expectations of future inflation expectations. The growing rates signals that investors are seeing inflation rising faster than what Central Banks have predicted and predicting that Central Banks to lift rates earlier than most have indicated (typically around 2024).
The perceived rise in inflation is largely driven by rapidly rising commodity prices. Commodity prices are at either all time highs or at record levels not seen for at least 10-15 years in the case of Copper and Iron Ore. As commodity prices increase this will flow through into inflation into the economy. E.g. Rising Iron ore prices drives up the price of steel, which makes everything from houses to cars to more expensive.
It is important to note that this is all "predicted inflation", inflation in most economies is well below the levels needed for Central Banks to act. (See numbers below). Fed Chair, Jerome Powell has a view that a rebounding economy can live with slightly higher rates and a rise in commodity prices is not enough to drive inflation across the whole market. His view is that when wages and consumer prices lift, we would start to have a problem.
US Actual = 1.4% Target = Moderately above 2.0%
AU Actual = 0.9% Target = 2-3%
CA Actual = 1.6% Target = Sustainably above 2%
NZ Actual = 1.4% Target = sustained at 2% per annum
Powell argues that the rise in commodity prices can be easily absorbed, and believes that much of that rise is just a temporary condition reflecting the reopening, and that prices will revert back to “normal” levels over time.
However, investors are seeing that if inflation takes off, the Fed and other Central Banks will be unable to hold rates at current low levels. And if the current trend in higher yields continues, this will have significant impacts for the stock market.
Economies are rebounding and looking to show significant GDP growth during 2021 thanks to the rollout of the vaccine and reopening. This growth may (In the case of the US) be fuelled by additional fiscal stimulus but is certainly being underpinned by monetary stimulus which kept rates low during 2020.
The rise in bond yields can be attributed directly to investors expectations of future inflation expectations. The growing rates signals that investors are seeing inflation rising faster than what Central Banks have predicted and predicting that Central Banks to lift rates earlier than most have indicated (typically around 2024).
The perceived rise in inflation is largely driven by rapidly rising commodity prices. Commodity prices are at either all time highs or at record levels not seen for at least 10-15 years in the case of Copper and Iron Ore. As commodity prices increase this will flow through into inflation into the economy. E.g. Rising Iron ore prices drives up the price of steel, which makes everything from houses to cars to more expensive.
It is important to note that this is all "predicted inflation", inflation in most economies is well below the levels needed for Central Banks to act. (See numbers below). Fed Chair, Jerome Powell has a view that a rebounding economy can live with slightly higher rates and a rise in commodity prices is not enough to drive inflation across the whole market. His view is that when wages and consumer prices lift, we would start to have a problem.
US Actual = 1.4% Target = Moderately above 2.0%
AU Actual = 0.9% Target = 2-3%
CA Actual = 1.6% Target = Sustainably above 2%
NZ Actual = 1.4% Target = sustained at 2% per annum
Powell argues that the rise in commodity prices can be easily absorbed, and believes that much of that rise is just a temporary condition reflecting the reopening, and that prices will revert back to “normal” levels over time.
However, investors are seeing that if inflation takes off, the Fed and other Central Banks will be unable to hold rates at current low levels. And if the current trend in higher yields continues, this will have significant impacts for the stock market.