Is US bond market crash a realistic scenario?


The recent US government bonds yield hike of last week has made some wonder, Is US bond market crash a realistic scenario? An analyst at Swissquote has shared his viewpoint.

16 January, Swissquote – Right now, investors are pretty apprehensive, not knowing if a crash in the U.S bond market is imminent.  It was reported last week, that yields on key government bonds spiked for the first time in a decade. But the question weighing on the minds is, Is US bond market crash a realistic scenario?

Is US bond market crash a realistic scenario?

Since the recent US government bonds yield hike of last week (2-year government bond rates reaching above 2%, a 10 years high) and the market excitement that followed, coupled with possible Japanese and European central bank policy tightening, we could wonder whether we might be expecting an imminent US bond market crash in the next couple of days!

All ingredients would be there: a sudden US government bond rate hike increase, equity markets keep going up (hypothesis: the propensity of investors to take a further risk for higher returns pushes bondholders to invest into equity markets), the timing of policy tightening can potentially become unpredictable.

A Swissquote Analyst’s Perspective

From our perspective, Friday, January 12th, 2018 moves in the bond market were strongly influenced by December US core CPI growth (above expectations at 1.80%), coupled with strong monthly retail sales data (0.4%, on line with consensus) that signify faster-than-expected Fed policy tightening. Looking at the US 10-year and 2-year yields, we remain confident that as long as the yields range around the 3% and 2.50% respectively, the US bond market remains stable.

We think that the US bond market conditions should rather be interpreted as positive and indicates that the US economy grows at an active pace. In any case, further rate hikes will expose the US government to higher interest rates, bearing in mind that the US government carries a national debt worth of USD 20 trillion that would remain expensive in the longer term.

GBP/USD holds ground after hitting 1.38, USD picks up

After printing a new multi-month high on Monday, the pound sterling has stabilized gains at around $1.3785. Since the beginning of the year, the pound sterling and the single currency have been moving side by side, suggesting that the market was more focused on the Trump situation rather than the divorce between the EU and the UK. In our opinion, Brexit risks are currently underestimated and investors seemed to have forgotten that the EU has the upper hand and is currently taking a tougher stance on transition talks.

UK inflation figure to go unnoticed

December inflation figures are due for release this morning. No major surprise is expected: the headline measure should ease to 3%y/y from 3.1% in November. The core measure, which excludes the most volatile components, is anticipated to come in at 2.6%y/y, down from 2.7%. Despite the improving inflation outlook, there is little chance that the BoE would step in anytime soon as only two to three hikes are expected over the next 36 months. Therefore, we remain cautious regarding further GBP appreciation.

Disclaimer

This article Is US bond market crash a realistic scenario? was written by Arnaud Masset & Vincent-Frédéric MIVELAZ, Market Analyst at Swissquote.

While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein.

This document does not constitute a recommendation to sell and/or buy any financial products and is not to be considered as a solicitation and/or an offer to enter into any transaction. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or in any other kind of investments.

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