Since the recent US government bonds yield hike of last week (2-year government bond rates reaching above 2%, a 10 years high) and the market excitement that followed, coupled with possible Japanese and European central bank policy tightening, we could wonder whether we might be expecting an imminent US bond market crash in the next couple of days ! All ingredients would be there: a sudden US government bond rate hike increase, equity markets keep going up (hypothesis: the propensity of investors to take further risk for higher returns pushes bondholders to invest into equity markets), the timing of policy tightening can potentially become unpredictable.
From our perspective, Friday January 12th 2018 moves in the bond market were strongly influenced by December US core CPI growth (above expectations at 1.80%), coupled with strong monthly retail sales data (0.4%, on line with consensus) that signify faster-than-expected Fed policy tightening. Looking at the US 10-year and 2-year yields, we remain confident that as long as the yields range around the 3% and 2.50% respectively, the US bond market remains stable. We think that the US bond market conditions should rather be interpreted as positive and indicates that the US economy grows at an active pace. In any case, further rate hikes will expose the US government to higher interest rates, bearing in mind that the US government carries a national debt worth of USD 20 trillion that would remain expensive in the longer term.By Vincent-Frédéric MIVELAZ