Bond yields down as investors move to safe haven instruments

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Bond yields down as investors move to safe haven instruments

Treasuries are the closest thing out there to a risk-free asset because there's an assumption that the USA will never default on its obligations.

The CBOE Volatility index, the closely followed measure of expected near-term stock market volatility, jumped 20 points to 30.71, its highest level since August 2015.

Mr Morrison told reporters in Canberra the market was reacting to last week's U.S. wage data and more bullish sentiment about what's happening with inflation and its impact on bond markets. A PE ratio of 24.53 for BSE Sensex on Friday suggested that investor were willingness to pay Rs 24.53 for every Re 1 of Sensex earning. Silver dipped 4 cents to $16.67 an ounce.

The expectations that the Fed will stay the course is helping widen the spread on 10-year Treasuries over similar-maturity bunds. And with the robust jobs report Friday showing the fastest wage growth in years, some think the pace of rate increases could quicken. A higher fiscal deficit forces the government to go for higher market borrowings.

Some investors had been reluctant to stand in the way of the selloff, which has sent 10-year yields up from a low of 2.654 percent last Monday, until they see signs of stabilization.

"This will be bad for bonds and mediocre for equities".

Rory McPherson, head of investment strategy at Psgima IM, said investors should expect more volatile markets heading into 2018, as this is the first year where the marginal buyer of bonds is not a central bank.

So as bond yields keep on running up and equity markets continue to fall, you are getting whacked on both sides. "Now they are saying we will take out the steroids, because it could have side-effects", said Nilesh Shah, MD at Kotak AMC.

Patterson explains the relevance of America's long-standing strong dollar policy to the Fed's ability to support the economy - and the risks of its abandonment by the Trump administration.

The rise in bond yields, fuelled by a surging USA economy and corporate earnings, has spooked traders anxious that the Federal Reserve will raise borrowing costs more than the three times initially expected this year.

That is not to say the market is collapsing.

In oil markets, Brent LCOc1 fell 0.86 percent to $68.09 a barrel and US crude CLc1 dropped 0.76 percent to $65.07. A rise commodity prices also raises inflation. For a $10,000 bill, the three-month price was $9,962.08 while a six-month bill sold for $9,916.58. That hurt banks by sending interest rates lower, which means banks can't charge as much money for mortgages and other types of loans. Therefore, we do not need to offer such a big risk premium to come into NZ bonds.

"We have seen the US Fed warning the markets that it would be raising interest rates".

Three rate hikes are priced in for 2018. "There is no doubt interest rates will rise and liquidity will be withdrawn but it will be gradual and calibrated in nature", said Shah of Kotak Mutual Fund.

However, rising bonds does not always lead to poor equity performance.

On Monday, the S&P 500 ended 7.8 percent down from its record high on January 26, with the Dow down 8.5 percent over that time.

In a statement following the two-day policy meeting, the Fed said "inflation on a 12-month basis is expected to move up this year", predicting it will stabilise around its 2% target over the medium term.

Investors in utility and real estate stocks - and indeed all dividend-paying equity sectors - should, however, recognize the threat that further increases in bond yields would present to future portfolio returns.

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