### 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
- 💸 The era of cheap debt might be over, and it can lead to a big shift for investors.
- 💰 Real bond yields are returning to their natural state.
- 📉 Rising yields for long-term rates are driving the recent market sell-off.
- 🌍 Real yields are rising across the world.
- 📉 The conditions we're seeing now are more like they used to be before the global economy imploded.
- 🏢 Assets boosted by easy credit will need to correct, including real estate.
- 💼 Rising real rates will impact public spending, household borrowing, and asset values.
- 💡 Pensions and savers may benefit from a rising real rate environment.
- 📉 Excess speculation can easily occur if stability requires pursuing significant risk.
- 🚀 The return to positive real yields is a big shift closer to the historical baseline.
- 🔍 Few signs of a recession in the US, with 5.8% GDP growth forecasted for Q3.
### Summary
The S&P 500 returns over the last one, five, and ten years are only slightly above their long-term averages, suggesting that the stock market is not unanchored from reality. However, the performance of long-term US Treasuries has been poor, with even 10-year Treasuries resulting in losses over the last five years. Slower economic growth may be on the horizon, but it remains uncertain whether it will be enough to bring down inflation rates.
### Facts
- The S&P 500 returns over the last one, five, and ten years are only slightly above their long-term averages.
- The performance of long-term US Treasuries has been weak, resulting in losses for investors even after accounting for coupon payments.
- Slower economic growth may be on the horizon, but it remains uncertain if it will bring down inflation rates.
- The nature of the stock market rally suggests that investors are still searching for buying opportunities rather than thinking about selling.
- Energy, industrials, and financials have become favored sectors, while technology stocks have started to decline.
- The Chinese economy is struggling, with retail sales and industrial production growth slowing down.
- The Federal Reserve has expressed concerns about inflation but also noted downside risks to the economy.
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### Summary
Investors are looking to put their cash into junk assets as fears of a severe US recession recede, leading to increased demand for high-yield markets and borrowers taking advantage of refinancing and amend-and-extend transactions.
### Facts
- There is an excess demand for high-yield markets due to limited issuance, resulting in borrowers having more flexibility through refinancing and amend-and-extend transactions.
- The amount of high-yield credit due in 2025 has decreased by almost 12% since the start of 2023.
- US GDP growth is expected to increase, leading to Morgan Stanley lowering its base case for US junk and loan spreads.
- Safer companies are holding back from taking advantage of the rally, anticipating lower borrowing costs in the future.
- Risk appetite has softened due to concerns over higher interest rates, leading to a two-speed economy and potential challenges for companies with high levels of leverage.
- The private credit market set a record with the largest loan in its history, and several other notable financial transactions have taken place in the week.
- There have been personnel changes in various financial institutions, including Credit Suisse, Canada's Bank of Nova Scotia, and Santander.
The U.S. economy continues to grow above-trend, consumer spending remains strong, and the labor market is tight; however, there are concerns about inflation and rising interest rates which could impact the economy and consumer balance sheets, leading to a gradual softening of the labor market.
The U.S. stock market experienced some volatility this week, but the artificial intelligence boom helped offset rising bond yields, as investors wait for key economic data to assess the markets' performance.
Seasonal trends are causing increased market volatility, consumer savings depletion is leading to higher credit delinquencies, and mega-cap tech stocks are declining, according to the Fast Money Halftime Report.
HSBC economists predict that higher borrowing costs will lead to a decline of more than 1% in the euro zone's GDP by 2025, potentially causing a recession, although the British economy is expected to be less affected due to government-backed loans and healthy balance sheets.
The Wall Street Journal reports a notable shift in the stance of Federal Reserve officials regarding interest rates, with some officials now seeing risks as more balanced due to easing inflation and a less overheated labor market, which could impact the timing of future rate hikes. In other news, consumer credit growth slows in July, China and Japan reduce holdings of U.S. Treasury securities to record lows, and Russia's annual inflation rate reached 5.2% in August 2023.
Economist David Rosenberg has not yet seen his recession prediction materialize, as the US economy has shown strength and resilience; however, he still believes a downturn is imminent and suggests investors focus on defensive sectors such as consumer staples, healthcare, telecommunications, and utilities. He also recommends considering long-term bonds as the best risk-reward prospects in fixed income.
Higher interest rates are causing a downturn in the stock market, but technological advancements in recent decades may provide some hope for investors.
Michael Santoli, senior markets commentator at CNBC, discusses the outlook for the fixed income market, the state of the economy, and the stock market. He notes that the bond market is starting to register the Federal Reserve's plans to keep rates higher for longer, and that real yields are increasing due to higher inflation expectations and concerns over the size of current federal deficits and Treasury issuance. Santoli also suggests that it is still too early to fully understand the impact of artificial intelligence on productivity gains, and that the recent uptick in headline inflation is not expected to change the Federal Reserve's stance. He also notes that the stock market has been range-bound and indecisive, with some pockets of weakness in consumer cyclicals, but that the market is still pricing in somewhat benign economic conditions. Santoli highlights the concentration of the market in a few mega-cap growth stocks and the undervaluation of small-cap stocks, and discusses the outlook for the 60/40 portfolio in light of higher bond yields.
Government bond yields are spiking in the US, Europe, and the UK due to investors realizing that central bank interest rates may remain high for an extended period, and concerns over inflation and supply shortages caused by the retirement of baby boomers.
The U.S. stock market has experienced a decline due to conflicting economic news and a surge in bond yields, which may be driven by factors other than data, such as fiscal deficits and central bank policies.
Investors are becoming increasingly concerned about sustained high interest rates, with the bond and foreign-exchange markets already showing signs of adjusting, and if stock markets do not follow suit, the coming months could be particularly challenging.
The recent surge in bond yields, with 10-year Treasury yields hitting levels not seen in over 15 years, is impacting the stock market as investors shift their focus to safer bond investments, which offer higher yields and less volatility than stocks.
Higher interest rates are here to stay, as bond markets experience significant selloffs and yields reach levels not seen in years, with implications for mortgages, student loans, and the global economy.
The recent selloff in bond markets has led to higher yields and the breaking of key levels, indicating a potentially new normal of higher interest rates with implications for mortgages, loans, credit cards, and the global economy as a whole.
Rising interest rates, rather than inflation, are now a major concern for the US economy, as the bond market indicates that rates may stay high for an extended period of time, potentially posing significant challenges for the sustainability of government debt.
The U.S. bond market is signaling the end of the era of low interest rates and inflation that began with the 2008 financial crisis, as investors believe that the U.S. economy is now in a "high-pressure equilibrium" characterized by higher inflation, low unemployment, and positive growth. The shift in rate outlook has significant implications for policy, business, and individuals.
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.
The article discusses the recent rise in Treasury yields and explores the positive aspects of higher bond yields.
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.
The recent surge in global bond yields, driven by rising term premiums and expectations of higher interest rates, signals the potential end of the era of low interest rates and poses risks for heavily indebted countries like Italy, as well as Japan and other economies tied to rock-bottom interest rates.
The recent surge in bond yields is causing a significant shift in markets, but there is still optimism among investors.
Market observers are concerned about a sharp jump in Treasury yields similar to that of the 1987 crash, and Saxo Bank's chief investment officer Steen Jakobsen suggests that investors reduce risk by increasing cash balances, hedging portfolios, rotating into short-term bonds, favoring defensive sectors over cyclicals, and avoiding mega-cap stocks.
The fixed-income market is experiencing the "greatest bond bear market of all time" according to Bank of America Global Research, as the yield on 30-year US Treasuries hit a peak-to-trough loss of 50% and bond funds saw $2.5 billion in outflows, while shorter-dated paper and equity funds continue to see inflows.
The "greatest bond bear market of all time" is occurring as the fixed-income market faces a significant decline in the U.S. 30-year yield, leading to outflows from bond funds and a rise in Treasury yields.
The market is currently more concerned about the national debt than short-term data, with the focus shifting to worry about the debt's rapid growth and the impact of high interest rates, while waiting to see the results of the monthly jobs report.
Longer-term Treasurys and other fixed income investments are recommended to navigate the impact of rising bond yields, offering attractive opportunities and higher yields to those looking to park their cash.
The rise in Treasury bond yields above 5% could lead to a more sustainable increase and potential havoc in financial markets, as investors demand greater compensation for risk and corporate credit spreads widen, making government debt a more attractive option and leaving the stock market vulnerable to declines; despite this, stock investors appeared unfazed by the September jobs report and all three major stock indexes were higher by the end of trading.
