### Summary
The recent market sell-off and rising yields are not driven by rising inflation expectations but by rising real yields across the world, signaling a return to pre-Global Financial Crisis conditions.
### Facts
- Real bond yields are returning to their natural state as the easy credit environment since the Global Financial Crisis is reversing.
- Rising inflation expectations typically drive yields, but the recent market sell-off is caused by rising yields for long-term rates.
- Central banks are hiking rates and removing liquidity, reducing the supply of credit and raising interest costs.
- Rising demand for capital and geopolitical tensions are also contributing to the rise in yields.
- Market conditions now are more like they used to be before the Global Financial Crisis, while the post-2008 to 2022 era was the unusual period.
- Rising real rates are expected to impact public spending, household borrowing, and asset values, while pensions and savers may benefit.
- The return to positive real yields is a big shift closer to the historical baseline.
- Despite recession talk, there are few signs of a recession in the US, with GDP growth forecasted at 5.8% for Q3.
### Emoji
- đ¸ The era of cheap debt might be over, and it can lead to a big shift for investors.
- đ° Real bond yields are returning to their natural state.
- đ Rising yields for long-term rates are driving the recent market sell-off.
- đ Real yields are rising across the world.
- đ The conditions we're seeing now are more like they used to be before the global economy imploded.
- đ˘ Assets boosted by easy credit will need to correct, including real estate.
- đź Rising real rates will impact public spending, household borrowing, and asset values.
- đĄ Pensions and savers may benefit from a rising real rate environment.
- đ Excess speculation can easily occur if stability requires pursuing significant risk.
- đ The return to positive real yields is a big shift closer to the historical baseline.
- đ Few signs of a recession in the US, with 5.8% GDP growth forecasted for Q3.
đ Money managers who loaded up on US government bonds as a bet against recession are now facing subpar returns and a deepening selloff as Treasury yields rise.
đ The annual return on US government bonds turned negative last week as Treasury yields reach a 15-year high, suggesting that interest rates will remain elevated and the economy can handle it.
đ Bob Michele, CIO for fixed income at J.P. Morgan Asset Management, remains undeterred and is buying every dip in bond prices.
đ Other prominent money managers, including Allianz Global Investors, Abrdn Investments, Columbia Threadneedle Investments, and DoubleLine Capital, believe that the impact of Federal Reserve rate hikes is just starting to be felt by the economy and predict a recession.
đ Fund managers are making adjustments to duration to hedge their positions, with some shortening duration while others maintain overweight positions.
đ Historical patterns suggest that rate hikes often lead to slumping economies, but it remains uncertain whether yields will follow the same pattern this time.
đ The borrowing needs of wealthy economies and the flood of debt issuance may lead to higher yields.
đ Despite the current environment, some funds that took short bond, long stock positions have faced significant drawdowns, indicating that rates may remain elevated.
đ J.P. Morgan's Michele is confident that bond yields will fall once the Fed finishes its tightening cycle, even before the first rate cut.
Despite recent positive economic indicators, experts warn that a recession may still be on the horizon due to the lagged effects of interest rate hikes, increased debt, and a slowing manufacturing sector, cautioning investors not to become complacent.
Banks face risks from their debt portfolios, especially mortgage-backed securities, as highlighted by the 40% drop in Apple's bonds due to interest-rate increases by the Federal Reserve, according to Larry McDonald.
Central banks are likely to push western economies into a recession in order to tackle inflation, according to a member of Jeremy Hunt's advisory council. Karen Ward, an economist at JP Morgan Asset Management, believes signs of weakness will be needed before policymakers can ease their tough approach, as the message from a recent gathering of central bankers in Wyoming was that borrowing costs would need to be higher for longer than expected. Ward's comments come as Germany reports its highest wage growth figure since 2008.
Fidelity International's Salman Ahmed predicts a recession due to high interest rates and the increasing costs of refinancing corporate debt that's becoming due in the next few years.
Goldman Sachs economists have lowered their probability of a recession in the next 12 months to 15% from an earlier forecast of 20%, citing cooling inflation, a strong labor market, and the belief that the Federal Reserve is done raising interest rates.
Deutsche Bank strategists warn that the U.S. economy has a greater chance of entering a recession within the next year due to high inflation and the Federal Reserve's aggressive interest rate hike campaign.
Despite bond rating agencies issuing warnings and downgrades for banks in the US, equity analysts argue that the warnings were inaccurate due to rising bank stock prices and better-than-expected earnings reports. However, the regional banking sector has still experienced a significant decline this year and faces uncertainty regarding the future role of banks in providing credit to the economy. Additionally, the debate about banks revolves around interest rates and the state of real estate, particularly office buildings.
The US economy is facing a looming recession, with weakness in certain sectors, but investors should not expect a significant number of interest-rate cuts next year, according to Liz Ann Sonders, the chief investment strategist at Charles Schwab. She points out that leading indicators have severely deteriorated, indicating trouble ahead, and predicts a full-blown recession as the most likely outcome. Despite this, the stock market has been defying rate increases and performing well.
US banks are experiencing significant deposit outflows, with total bank deposits plunging by over $70 billion in a week, the lowest levels since May, leading to concerns about the ongoing regional banking crisis; meanwhile, US commercial banks have also suffered significant losses in deposits, with 60% of deposits moving to higher-yielding money market funds, and the balance of unrealized losses on securities at commercial banks rising to $558 billion in Q2; to address these issues, the Federal Reserve has reached an all-time high of $107.8 billion in its banking loan facility to provide funding to distressed banks.
The Federal Reserve Bank of New York's recession probability tool, which examines the difference in yield between the 10-year U.S. Treasury bond and three-month bill, suggests a 60.83% probability of a U.S. recession through August 2024, indicating that stocks may move lower in the coming months and quarters. However, historical data shows that U.S. recessions are typically short-lived, and long-term investors have little to worry about.
The Federal Reserve has paused raising interest rates and projects that the US will not experience a recession until at least 2027, citing improvement in the economy and a "very smooth landing," though there are still potential risks such as surging oil prices, an auto worker strike, and the threat of a government shutdown.
The bond market's recession indicator, known as the inverted yield curve, is likely correct in signaling a coming recession and suggests that the Federal Reserve made a major mistake in its inflation policy, according to economist Campbell Harvey. The yield curve, which has correctly predicted every recession since 1968, typically lags behind the start of a recession, with the average wait time being 13 months. Harvey believes that a recession is imminent due to the Fed's tight monetary policy and warns against further interest rate hikes.
The forecasted U.S. recession in 2024 is expected to be shorter and less severe than previous recessions, with the economy's interest-rate sensitivity much lower due to reduced leverage and elevated savings from the postpandemic environment, leading investors to consider positioning for investment opportunities that will drive markets into 2024.
A recession is highly likely in the US and investors should prepare for it by adopting a defensive strategy, according to the CEO of the TCW Group, Katie Koch, who believes that the Federal Reserve's interest rate hikes will start to have an impact and expects consumers and companies to struggle in this environment.
Yields in the bond market are rising due to several factors including higher inflation premium, hawkish Fed policy, rising energy prices, and increased Treasury debt issuance.
Deutsche Bank's economists are still predicting a US recession despite the ongoing resilience of the economy, pointing to rapidly rising interest rates, surging inflation, an inverted yield curve, and oil price shocks as the four key triggers that historically have caused recessions and are currently happening.
Rising Treasury rates and oil prices are creating an unfavorable situation for consumers, investors, and the economy, making it challenging for the Federal Reserve to manage inflation without causing a recession. The potential for a "soft landing" and decreased inflation remains, but the economy should prepare for possible sector-by-sector recessions and a full-blown recession, along with government shutdowns and fiscal policy disputes becoming normal occurrences. The discrepancy between short-term and longer-term rates controlled by the Fed has gained importance, with higher borrowing costs disrupting the stock and bond markets. In this volatile period, long-term investors should hold on and ensure they have enough money saved to weather the storm. While the Fed has pushed short-term rates higher, it has also benefited savers with higher yields on money market funds, short-term Treasury bills, and high-yield savings accounts. However, a strong dollar has impacted S&P 500 earnings, leading to a struggling stock market and increased costs for imports and exports. Rising interest rates pose the greatest economic challenge, affecting consumer loans and dampening spending. Traders who bet on long-term bonds have faced losses due to rising rates, highlighting the inverse relationship between interest rates and bond prices. As a result, it may be advisable to purchase shorter-term Treasuries and keep bond durations lower. The surge in bond yields has also disrupted stock investors' expectations of controlled inflation and the Fed's tightening, leading to stock market losses. The economy and markets may experience more turmoil, as there are various factors beyond the Federal Reserve's control.
The bond yield curve, a reliable predictor of economic downturns, is warning of serious trouble ahead, as it has accurately predicted the last six recessions since 1978. The inverted yield curve, which is currently being observed, indicates investor panic and adds to the sense of a looming recession.
Investors and experts differ on the timing, but many believe a recession is inevitable in the near future due to falling consumer confidence and a slowing economy, prompting discussions about the Federal Reserve's interest rate moves.
The stock market's resilience in the face of rising bond yields could be a warning sign, as it mirrors the conditions seen before the 1987 stock crash and any sign of recession now could lead to a major sell-off, according to Societe Generale strategist Albert Edwards.
Rising interest rates are actually hurting bank stocks instead of helping them, disappointing bank investors who had been hoping for the opposite outcome.
The Federal Reserve's shift towards higher interest rates is causing significant turmoil in financial markets, with major averages falling and Treasury yields reaching their highest levels in 16 years, resulting in increased costs of capital for companies and potential challenges for banks and consumers.
Treasury yields continued to rise, reaching the highest levels since before the 2007-2009 recession, as investors demand more compensation to hold Treasuries and the bond-market selloff deepens, which has impacted stock markets and wiped out gains.
DoubleLine Capital founder Jeff Gundlach warns that soaring bond yields indicate a recession is imminent in the US.
Yields on U.S. Treasury bonds are rising uncontrollably, causing ripple effects in financial markets, as the 10-year Treasury yield reaches its highest level since August 2007, resulting in plummeting bond prices and impacting various assets such as stocks and gold. The rise in Treasury yields is attributed to factors such as the U.S. government's expanding budget deficit, the Federal Reserve's quantitative tightening program, and its restrictive stance on interest rates.
Falling bond prices in the US, resulting in higher Treasury yields, suggest that a recession might be approaching, according to investor Jeff Gundlach, who is closely watching the upcoming jobs report for further signs.
Falling U.S. bond prices and the rapid normalization of the Treasury yield curve are signaling that a recession may be imminent, according to DoubleLine Capital founder Jeff Gundlach, who will be closely monitoring the September jobs report for further clues.
Investors are likely to continue facing difficulties in the stock market as three headwinds, including high valuations and restrictive interest rates, persist, according to JPMorgan. The bank's cautious outlook is based on the surge in bond yields and the overhang of geopolitical risks, which resemble the conditions before the 2008 financial crisis. Additionally, the recent reading of sentiment indicators suggests that investors have entered a state of panic due to high interest rates.
Violent moves in the bond market have sparked fears of a recession and raised concerns about housing, banks, and the fiscal sustainability of the U.S. government, with the 10-year Treasury yield reaching 4.8% and climbing steadily in recent weeks, its highest level since the 2008 financial crisis.
US bank stocks are currently the market's Achilles' heel, as they need to participate in any recovery rally in order to validate the notion that higher interest rates won't lead to a recession next year.
A new report warns that a recession may be imminent as employment, business optimism, and output continue to decline, with companies struggling to maintain staffing numbers and cope with higher borrowing costs and weaker customer demand.
Goldman Sachs economists warn that the recent surge in US Treasury yields will hamper economic growth and pose financial risks, though the bank does not predict a recession; they estimate a 0.5 percentage-point blow to US GDP over the next year.
US banks face the challenge of an extended period of high interest rates, which will pressure their profitability by increasing deposit costs, deepening bond losses, and making it harder for borrowers to repay loans.
The risk of a crisis event in the economy is increasing as the Federal Reserve's "higher for longer" narrative is threatened by lagging economic data, with historical patterns suggesting that yield curve inversions occur 10-24 months before a recession or crisis event, and the collision of debt-financed activity with restrictive financial conditions is expected to result in weaker growth.
Interest rates are a major focus in financial markets as rising rates have far-reaching consequences, making future projections less valuable and hindering investments, and there is still uncertainty about the full impact of rate hikes on the economy, potentially delaying the start of a recession until mid-2024.
Economists are predicting that the U.S. economy is less likely to experience a recession in the next year, with the likelihood dropping below 50% for the first time since last year, thanks to factors such as falling inflation, the Federal Reserve halting interest rate hikes, and a strong labor market.
European banking stocks are facing challenges as the effects of higher interest rates wane and recession risks increase, but investors believe their valuations are still too cautious despite a strong performance this year.
The U.S. economy is facing risks in 2024 as inflation remains high and interest rates are historically high, leading to concerns about a potential recession; however, the Federal Reserve is optimistic about achieving a soft landing and maintaining economic growth. Economists are divided on whether the Fed's measures will be effective in avoiding a severe recession, and investors are advised to proceed cautiously in their financial decisions.
Bond yields have surged as investors realize they are a poor hedge against inflation, while stocks are a much better option, according to Wharton professor Jeremy Siegel.
The surge in bond yields is causing losses for investment funds and banks, pushing up borrowing costs globally and impacting stock markets, while the dollar remains stagnant and currency traders predict a recession on the horizon.
The inverted yield curve, which is currently flashing red, is causing concern among economists, as it historically predicts recessions with a delay of around six to twelve months, although it is not fool-proof. Despite the current strong economy, experts suggest recession-proofing one's finances by paying off debt, building up an emergency fund, and investing in recession-proof assets.
The rapid increase in US government bond yields, similar to previous occurrences, has raised concerns about the possibility of back-to-back recessions, despite the economy's current resilience and strength.
Americans are already feeling the impact of higher bond yields, with mortgage rates topping 8%, personal loan rates at their highest level since 2007, credit card interest rates soaring, and delinquencies on credit cards and personal loans on the rise.
The tightening of financial conditions in the US economy, driven by rising borrowing costs, is starting to have an impact on small and regional banks, potentially leading to a contraction in credit availability and a recession.
