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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Equities face battering if bond yields rise sharply

Equities face battering if bond yields rise sharply

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Hanoifortune

Hanoifortune
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Equities face battering if bond yields rise sharply
Yields unsustainably low, but markets have not factored in this possibility


The consensus assumption is that yields on US Treasuries, by far the largest global bond market, will at worst rise by a half per cent or one per cent in the coming year. If the US, European and Asian economies perform below par, the current yield range for US treasury bonds of ten-year maturity dates, will continue at 1.5 to 2 per cent, the consensus contends

GLOBAL equity and commodity markets are currently not factoring in the implications of an unexpected steep rise in global bond yields.

The consensus assumption is that yields on US Treasuries, by far the largest global bond market, will at worst rise by a half per cent or one per cent in the coming year. If the US, European and Asian economies perform below par, the current yield range for US treasury bonds of ten-year maturity dates, will continue at 1.5 to 2 per cent, the consensus contends. Only a small minority believe that economies will grow at a rapid rate and that inflation will accelerate, causing US Treasury ten-year bond yields to jump over 3 per cent from current levels of 1.9 per cent.

A huge problem could arise, however, if the bond yields were to rise from their current "unsustainably low" levels to somewhere above 4 per cent. This could impact equity markets and cause a bear market slide, some argue.

EPFR Global, which monitors global funds, estimates that the total amount invested in bond funds at the end of last year amounted to a whopping US$4.7 trillion. This is only a small proportion of the total as McKinsey estimated that at the end of 2010, total global bond holdings amounted to over US$90 trillion.
http://www.businesstimes.com.sg/premium/top-stories/equities-face-battering-if-bond-yields-rise-sharply-20130115

raptor


Manager - Equity Analytics
Manager - Equity Analytics
This is not going to affect local equity markets.

UST yields have been forecasted to rise since 2009 but given that Fed base rate is 0.25% and doesnt really seem to be going anywhere there is little risk for UST rates rising anywhere beyond 2-2.5%. 4% is a LONG LONG way off. That will only happen when the US economy is steadily recovering and the Fed starts raising base rates. I work in international fixed income and this is staple bread and butter stuff.

Either way its not going to affect local equity markets so players on this forum shouldn't be worried about this.

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