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Markets recede on US Bond rally – Market Analysis

Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
US Bonds experience significant volatility on market pessimism

North American treasuries have experienced significant falls during the last week, the yield of TNOTE10 has increased 19 bps to 0.69% during this period. 

As we can see in the chart, the bond price is down to the 139.00 zone where it finds a level of support marked by a concentration of rate during June and July. This market movement is of considerable magnitude and has effects on the rest of the equities. 

What are the causes of this selling flow of bonds? 

On the positive side, it would be an improvement in the perception of risk on the part of investors that would lead them to exit safe-havens such as sovereign bonds. 

But, although it is true that the mood of investors has improved and remains modestly optimistic, there are still various elements of uncertainty, such as the duration of the pandemic, still unclear, the high climate of tension between the United States and China. 

The labor market may be affected by the end of the support measures implemented by the government and a lack of agreement on the stimulus package in the American Congress. 

Besides, today Secretary of State Mnuchin has declared that the reduction of the capital gains tax that President Trump announced yesterday as an objective of his stimulus policy would need legislative approval so it will be impossible for it to be implemented in this legislature. 

Fear-on scenario

Therefore, it is not reasonable to think, at the moment, that investors sell their positions in sovereign bonds due to an increase in risk appetite.

The negative side of the origin of these flows would be an increase in inflation expectations. Although domestic demand is not yet at full capacity, the enormous amount of liquidity provided to the system through fiscal and monetary stimulus measures, plus the potential increase in production costs derived from dysfunctionalities in the supply chains due to the pandemic, could translate into changes in consumer prices.

Today's Core CPI (MoM) figure for July points to this, a rise of 0.6% vs. 0.2% expected, well above the average of recent decades. If this trend continues, the Federal Reserve will run into a problem. 

With the most significant stimulus package in history and unprecedented low-interest rates - all necessary to keep the economy going - it would find itself without tools to stop the price spike.

The medium-term effects of this scenario on financial assets would be, on the one hand, adverse for the stock markets, on the other, a weakening of the US Dollar. 

DollarIndex has fallen after the inflation figure came forth. 

And it would also constitute a weighty argument for the investors to continue to allocate funds to GOLD, which is a hedge against inflation-induced depreciation.

GOLD has explosively corrected downward, trading for a moment below what can be considered a support reference around $1920, its previous all-time high, and then recovering above this level. 

This movement, which was necessary to clean the market of the excess of long positioning of short-term investors, leaves the GOLD prepared to resume its upward path that will be boosted if the yields of US bonds rebound even more and/or if the Dollar weakens due to a rise in inflation.






Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.