US 10-year Bond Yields about to go to 3.5%?

A couple of things are happening in the bond space right now. Last week we got the flash PMIs for the major DM economies, and all fronts they were strong – all improved, and the composite flash PMI for developed markets rose to a new 6-year high. The first chart below shows how that indicator in recent years has moved in step with US 10 year bond yields (and for good reason): the clear implication being that bond yields look “too low” at this point.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

At the same time, the US Government is about to pass new tax legislation which could have big implications for the growth/inflation outlook (bearish bonds) and the deficit (likewise). You also have the US Federal Reserve now running quantitative tightening - passively running down its balance sheet by progressively reinvesting less principal from maturing bonds. This is happening at a time when bond market implied volatility is at a record low, which signals complacency and is also a familiar sign from previous turning points.
So as the macro backdrop looks more and more consistent with higher bond yields, it seems the market is just looking for a catalyst and the tax legislation could be just that. Our view is inflation heads higher across developed economies next year, so aside from the risk of spikes in bond yields, the odds are that a multi-year turning point is in place for global bond markets.
The acceleration in the DM composite manufacturing PMI is consistent with a drive higher in bond yields.

Bond market implied volatility is at record lows. This represents a certain degree of complacency creeping through the market, and is a familiar sign from previous major turning points.

For more and deeper insights on global economics and asset allocation, and some more good charts you may want to subscribe to the Weekly Macro Themes. Click through for free look or a trial.

CIO Of One Of The World’s Most Successful Hedge Funds Presents His Top Long And Short

E-CommerceEgerton Capital was co-founded in 1994 by John Armitage. Since then, the firm has yielded huge profits for its investors. Some estimates put the total value of investing earnings at over $20 billion, making it one of the most profitable hedge funds of all time. Q3 2020 hedge fund letters, conferences and more SORRY! This Read More

Previous articleWhich Countries Are The Worst For Drinking-Driving?
Next articleEight Lessons Learned From A Digital Advisory Rollout
Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.