Currently, the US 10 year bond yield is 3.211% and September inflation (reported on 11 October) printed 2.3%.
This suggests a real return (after adjusting for inflation) of just under 1%, meaning traders can make money in bonds and longer dated fixed interest.
Clearly, the 30% growth in bond yields has outperformed the 4% growth in the Dow (as a proxy for equities) since January. The Dow has barely moved the needle.
I think it’s also worth noting that the yield increase has so far not been accompanied by an increase in risk/fear. That is, gold is down (as is oil) and even though the volatility index is slightly up, it is still relatively benign.
These circumstances will probably provide further justification for investors and traders to weigh up the sensibilities of shifting out of high risk equities, into lower risk positive real rate of return bonds.
Also, if it is true that recent US bond auctions have not been well supported by China, it may be that a more tepid bond auction has caused prices to fall and yields to rise.
With further banks and economic bail-outs going on in China, it would not surprise me if China-originated capital is being withdrawn from the US and brought back to China to support the domestic economy.
Count down to an inflexion? China capital flow issue? October normalisation?
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