"Snap back to reality
Oh, there goes gravity
Oh, there goes Rabbit, he choked
He's so mad, but he won't give up that easy, no
He won't have it, he knows his whole back's to these ropes" - Eminem
Staying on the rap/hip-hop theme this week. What is the reality that the market is being snapped back to? The rising costs of capital around the globe.
Today I show you the 10 year yields of the US, Germany, UK and Japan. All are either going to recent new highs or are approaching the levels seen late last year. The furthest away is UK but that was a shock level & it is still approaching it.
This has real implications for the cost of capital for companies. Go back to the piece on Monday about the availability of money and the propensity to invest or spend it. When the cost is high, this velocity will fall which it has.
All are high and moving higher. There are a few things at work here for sure. The first is the stickiness of inflation via the services channel. This is particularly the case in the US and JayPo is well aware of it.
The second is the combination of a China re-opening potentially moving commodities higher, combined with tensions with China meaning its disinflationary influence on global supplies may not happen as before.
A third is the ongoing war in Ukraine. This has the scope to get bigger and not smaller in spite of some discussion of negotiations. War is inflationary.
Another is the approaching Japanese fiscal year end at the end of March, with the potential for repatriation of Yen by Japanese savers abroad in foreign bond mkts ahead of a potential change in BOJ policy.
Still another is the not-yet-discussed debt ceiling debate in the US which is just goin to heat up. I had a post last Friday about fiscal spend and inflation. The CBO is scoring the increase of mandatory federal outlays alone at 15% of GDP this year.
Did we point out how much debt was moved to sovereign balance sheets after the GFC? The US debt to GDP stands around 130%. Reinhart & Rogoff have written about how 100% debt to GDP is the crisis-level threshold.
Yet another is the higher inflation readings in Europe that we have gotten this week that follow the higher inflation readings in the US the last 2 weeks.
There goes gravity as it is affecting the price of bonds (inverse of yields). Did I mention the very elevated level of sovereign bond volatility as well? Traders sense this all.
"You only get one shot, do not miss your chance to blow
This opportunity comes once in a lifetime"
Stay Vigilant, Slim Shady.
#markets #investing #yields #bonds #stocks #inflation #geopoliticalrisk