German bond yields tumble as investors retreat to safer…


Wall Street has failed to stage a lasting rebound from Monday, when fears about the bond market sent the Dow plunging a record 1,175 points.

Wild swings over the past week have left stocks in the red for the year. But it certainly prompts central banks to take monetary action, which reduces liquidity in the system.

Here's what's driving the volatility.

"There are spots in the utility market; (stocks that are) trading at 18 to 21 (price-to-earnings), where they ought to be trading at 13 to 14". A rise in Treasury rates to about 4.3 per cent would leave the ratios even.

Improving inflation and other economic data has led investors to adjust for the prospect of faster economic growth and the potential that the Federal Reserve may raise interest rates faster than previously expected. Last week, the market was betting on possibly four hikes, and now the derivatives market is pricing in less than the three rate hikes the Fed forecast for this year.

There are speculations that the US Fed may turn hawkish, if inflation hits the target of 2 per cent growth. "The Fed's kind of this wild card because it could really pump the brakes pretty hard and cause the cost of borrowing to go up and really cause the economy to stall". That means companies have to pay more for their loans, which cuts into corporate profits. Interest rates affect everything from mortgages to auto loans, but are particularly important for calculating the value of anything expected to generate profits in the future.

"The market is still struggling to find an equilibrium and particularly to assess the upside for yields", said Commerzbank rates strategist Michael Leister. The thing that was worrying investors was the speed at which things were changing.

Stocks have also been on a tear because they have been one of the only investments with a decent return.

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That has only added to concerns over equity income plays, which targeted high-dividend stocks as an alternative form of "fixed income" to record low-yielding bonds. In a normal environment, stocks don't normally rise when bonds do, and bonds would normally be priced lower when economic news is positive.

Euro zone yields were also higher while a hawkish comment from the Bank of England regarding interest rates drove down United Kingdom stocks about 1 percent and boosted yields on United Kingdom government bonds to the highest since 2015. And the more bond yields rise, the more will be this opportunity cost. A supply glut could devalue bonds. A 3 per cent yield is looked upon by investors as a motive for people to flee the risk of stocks for the relative safety of bonds. It's easy and common because inflation is always a consideration for bonds.

Experts believe the volatility in the stock market has been brought about by investors turning their attention to bonds in the midst of the inflation scare. It's the opposite of something that has bugged stock bulls for years, the flattening yield curve, which can imply moribund expectations for long-term growth.

Stocks have been rising pretty much in a straight line since November 2016, and that's not exactly healthy.

The 10-year Treasury is the one to watch, and while many strategists targeted rates under 3 percent for this year, they acknowledge the risk is to the upside with yields potentially climbing to 3.25 percent.

A cooling-off period would be a good thing.

Volumes on USA exchanges meanwhile exceeded 9 billion shares for a fourth straight day on Wednesday, a figure surpassed just once before in the past seven months, according to Deutsche Bank.