“Signs from the Bond Market” – Yields Continue to Climb | Economics Global

Rising US Treasury yields continue to be the main focus of global markets, stalling a recovery rally in global equities, and prompting further investor rotation from growth stocks into cyclical and value equities.

In our most recent “Macro Moment”, “Back in the Spotlight – Yields in Focus”, we stated that various changes in key macro variables, such as the ongoing COVID-19 pandemic, inflation, and rising market yields, meant that global investors should expect some market volatility ahead. Events over the last few weeks show that this development continues to play out.

The US Senate has passed the long awaited US$1.9 trillion fiscal stimulus package, with hopes of getting the trillion-dollar package to President Joe Biden in the coming days. There are also further signs that the labor market is recovering, as US initial jobless claims fell to a three-month low in its last reading. Falling infection rates, and the global rollout of COVID-19 vaccination programs, have further added to global optimism about the economic recovery and further socio-economic normalization. As we have indicated prior, this positive economic outlook, coupled with signs of coming inflation later this year, has pushed both real and nominal yields higher.

Given this backdrop, in our view it is the pace in the rise in yields, rather than the level itself, that has created recent market volatility. Since the global financial crisis, a (sudden) rise of 50bps or more in US 10-Year real yields, in less than a months time, has been associated with weaker or even negative equity returns. Since January 2021, yields on the US 10-year have increased 58bps, from 0.88% to ~1.50% in less than 2 months. As global equities adjust to this new backdrop, we are not surprised by the current market volatility.

Despite the ongoing volatility, we do stress for market participants to take a step back and look at the recent market rout in context. Global equities have reached record highs in February 2021, and despite the recent sell-off, remain up ~2.00% for the year so far. Consistent with our view that this latest slump for global equities is a volatility spike, rather than a fundamental shift in the market dynamics, we recommend to market participants to consider the following:

Use Market Volatility as a Buying Opportunity

Market selloffs give long-term investors, especially those with ample levels of cash, the opportunity to invest in a bull market, in the context of a disciplined investment plan. Sharp market corrections are often accompanied by spikes in volatility, that offer investors opportunities to gain exposure into investment opportunities they otherwise wouldn’t have had.

Focus on the Cyclical Recovery

We still maintain the view that the recent fall in stocks was (also) driven by a market shift from growth sectors to more cyclical sectors of the economy, which is perfectly healthy given our outlook for the global economy. We believe this trend has more room to grow, and recommend investors shift their portfolio equity exposure toward sectors and industries that are likely to benefit from higher growth and increased yields, such as energy, financials, industrials, and materials.


As stated prior, we still retain a favorable view of the global markets for 2021. While the abrupt spike in rates will lead to increased market volatility, we don’t think this will prevent the markets from moving higher in the weeks and months ahead.

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© 2020 Economics Global Inc.

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