Macroscope | Here’s what could set off a ‘Minsky moment’ in paper assets
Global central banks are questioning their own policies which, at the very least, presages a volatile trading environment in the coming weeks and months
Last Friday proved to be one of the most revealing trading sessions since the world’s main central banks introduced their ultra-loose monetary policies in the wake of the 2008 financial crisis.
United States equities suffered their sharpest daily decline since Britain voted to leave the European Union (EU) on June 23 as two prominent US Federal Reserve officials hinted that interest rates could rise sooner than anticipated. The market-implied odds of a rate hike at next week’s eagerly anticipated Fed meeting currently stand at 22 per cent - just as the rally in global bond markets was going into reverse.
What is happening in global markets right now has little to do with the Fed
The yield on benchmark 10-year German bonds escaped negative territory for the first time since mid-July while its US equivalent shot up 8 basis points to its highest level since the end of June.
Japanese 10-year yields, meanwhile, as discussed in my column last week, have risen nearly 30 basis points since late July and are now almost in positive territory.
Yet it would be wrong to attribute the jump in yields to a sudden repricing of US monetary policy.
Indeed the most conspicuous feature of the current jitters in bond markets is that they have not affected the most sensitive and closely watched part of the sovereign debt markets: the short end of the US Treasury curve which reflects market expectations of the pace of rate hikes.