Symbolic US Treasury bond yields matter less than the impact of soaring debt levels
Nicholas Spiro says that the 3 per cent level on 10-year US Treasury bonds may have a certain psychological importance to investors, but is not out of the ordinary historically. What is out of the ordinary is global debt levels, especially as a result of Trump’s policies, and investors should prepare accordingly
Still, despite the significant risks posed by a further rise in the 10-year Treasury yield, it would be wrong for investors to continue obsessing over its precise level.
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Firstly, it is real yields, taking into account inflation, that provide a more accurate gauge of underlying financial conditions. The real 10-year Treasury yield remains comfortably below 1 per cent, half its level before the 2008 financial crisis. While it has risen markedly since 2016, it is still extremely low by historical standards.
Even the actual 10-year yield remains low (it stood at 4 per cent just before the financial crisis) and has fluctuated considerably over the past five years. Predictions of the end of a 30-year bull market in bonds have so far proved unfounded, with every spike in the 10-year yield followed by a decline. Bond investors themselves are sceptical about a disorderly sell-off, with more than half of the 56 analysts surveyed by Bloomberg anticipating that the 10-year yield will end 2018 within 25 basis points of 3 per cent.
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That these risks are not reflected in asset prices – in both developed and developing economies – is cause for concern. While the US bond market has at least begun to reprice – especially in the case of the two-year yield, which has shot up to its highest level since 2008 – many European and Japanese bonds are still trading in negative territory. Spreads, or the risk premium, on emerging market corporate debt, moreover, remain close to their historic lows.
A 3 per cent 10-year Treasury yield may be a milestone, but it should not overshadow other, more important, vulnerabilities in markets.
Nicholas Spiro is a partner at Lauressa Advisory