The bond-market tide may be on the turn. After weeks of inaction, 10-year U.S. Treasury yields are eyeing 3% once more. Continued momentum in the global economy could lead yields higher still.
Since rising in January, U.S. bond yields have mostly tracked sideways. Until last week the 10-year Treasury had spent 21 trading days meandering between 2.8% and 2.9%. Yields in Europe have reversed, with both German and U.K. 10-year yields back where they started 2018. That in part reflected the tension between data showing solid global growth and fears that trade disputes and political risk might cause greater disruption.
Recent developments would tend to undermine bonds and support riskier assets. The detente between the U.S. and Europe on trade, strong corporate results and a recent improvement in the tone of global economic data are pointing in that direction.
U.S. growth is clearly strong, with second-quarter gross domestic product expanding at a 4.1% annualized clip. On a nominal basis, growth is running at 7.4%. The gap between long-maturity bond yields and nominal growth, which historically have tended to track each other, is yawning wider. While unorthodox central-bank policy around the world has broken the link between yields and growth, it still makes sense as a pointer for which direction yields should be heading in.
And central banks are still, albeit gradually, on the path to tighter monetary policy. The Bank of England may raise rates this week, and European Central Bank President
sounded confident on both growth and inflation last week. Most significantly, there is speculation about a tweak in monetary policy from the Bank of Japan that could remove a key support for bonds: A small move higher in Japanese yields could lift yields around the globe.
True, the capacity for yields to vault higher is limited by fears such a move will generate about higher borrowing costs affecting growth. There may well be more room for yields to move outside the U.S., particularly in Europe.
Other markets have already started to move. The S&P 500 is up 5.4% in 2018. Even unloved European stocks are back in positive territory for 2018. Corporate bonds have rallied a little and emerging markets have seen a small bounce. Government bonds look like the laggard in reacting to the shifting mood.
Write to Richard Barley at firstname.lastname@example.org