The US bond is going through the third biggest bear market in its history

The ten-year American bond has today exceeded 3.8% yield, marking 2011 highs. In a short space of just over two years, a sigh when we talk about debt, the T-Note is in the third largest bear market in its history. You have to go back to World War I and the launch of the Marshall Plan to observe an adjustment of this magnitude. The big difference is that the previous periods lasted decades and decades.


“Large debt crises often end in disaster,” Bank of America’s strategy team warns this week. Analysts point out that the ten-year US bond is going through the third largest bear market in its history, and it is said soon. The above occurred between 1899 and 1920, at the end of World War I, with the signing of the Treaty of Versailles Y between 1946 and 1981. Big bond market adjustments last for decades, but the current one has been a matter of a couple of years. Started in August 2020.

Bonds work the same as equities. They are listed on the market and their price is set by investors as they buy and sell. Ten-year bonds in portfolio accumulate a loss of more than 15%, the worst exercise since 1949, when the US launched the Marshall Plan to rebuild Europe. However, the most interesting aspect is the performance they offer, which rises when they fall in price.

Since August, the sales of the American bond have been in blocks. But it does not only happen in the American debt. According to Bank of America calculations, the interest on the T-Note has grown 110 basis points. Those of the German bund 87 basis points, the fastest rally in rates since 1990. Something similar happens in French debt. Experts warn that the bond market crash is accompanied by massive liquidations in the stock market and liquidity problems in the market. “The true capitulation is when you have to sell what you love,” they comment ironically, to refer to the fall of the bond.

And today we have precisely had an example with the United Kingdom. British 2-year bonds have risen 40 basis points, 10-year bonds have shot up 8%, to 3.78% yield, and 30-year bonds have reached 4%, at 2011 highs. The reason It has been the tax reduction of the Government of Liz Truss that has presented today. As a bonus, the pound has fallen to a 37-year low against the dollar.

“The new era of deficit, more geopolitical risks, involves more military spending and is always inflationary,” recalls the firm in its analysis of the US Treasury, with the current situation. The rally in US bond yields is dragging down the rest of the countries and the reason is to be found in the tightening of the Fed’s monetary policy to try to tie inflation short.

The Federal Reserve executed its third consecutive 75 basis point hike. According to the probabilities given by CME’s WatchFed Tool, there is a 67% chance that there will be the fourth hike of 75 basis points at the next meeting on November 2compared to 32% for a 50-point rise.

The forecast of the directors of the Fed on the types for the next years, the so-called dot plot, tightened towards the end of the year, placing rates between 4 and 4.25% at the end of the year. In the previous quote, the official estimate placed the price of money between 3.5% and 3.75%. Market expectations are adjusting to this new scenario for the two conclaves that the Fed has left this year. For the meeting on December 14, they also anticipate another rise of 75 basis points to leave the price of money between 4.25% and 4.5%.

“I suspect that the bond bull market that began in the mid-1980s is coming to an end,” sums up Stephen Miller, manager of GSFM. And he adds that the yields are not going to return to the historical lows seen before and during the pandemic.” In the end, it is the Federal Reserve that moves the interests in fixed income and there is no interest in sending the American bond below 1% , with current inflation The high inflation the world is facing now means that central banks will not be prepared to reintroduce the kind of extreme stimulus that helped send Treasury yields below 1%, he said.

The steepest rate hike since the 1980s has depleted market liquidity, according to JP Morgan Chase. “Bond and currency markets have seen a more severe and persistent deterioration in liquidity conditions this year relative to other asset classes with little sign of reversal.“, Nikolaos Panigirtzoglou strategists wrote in London. “We are at extreme levels.”

Source: www.eleconomista.es

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J. A. Allen

Author, blogger, freelance writer. Hater of spiders. Drinker of wine. Mother of hellions.

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