May 22, 2022

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US bonds threaten to exceed 3% of the Rubicon as in the 2018 crisis

US bonds threaten to exceed 3% of the Rubicon as in the 2018 crisis

The performance of the bonds In recent days, its escalation has accelerated due to expectations of increases in interest rates s The 10-year US bond is approaching the psychological level of 3% in its profitabilityIt is a major obstacle for investors in organizing their investment portfolios. The last time it reached a similar level was at the end of 2018, when the US Federal Reserve started raising interest rates and the last crisis in the markets before the pandemic began. The Standard & Poor’s 500 It fell more than 17% in just three months and stood out 20 months minimum.

The cost of US debt this week was a maximum of 2.94% Since December 2018. Since February, the sovereign bond yield, which Reverse quotes for its price, has rebounded nearly 60% and accumulated five consecutive months of gains. the reason? Investors expect that the Fed Rates will go up important to try to curb the sudden increase in inflation.

Specifically, the escalation of US bonds above 3% has already occurred before when the Fed accelerated rate hikes at the end of 2018 with by 0.25 percentage points every three months. In December of that year, it reached 2.25%, the highest rate recorded by the US central bank since 2008.

The institution he chairs Jerome Powell Raising rates to 0.5% After rising 25 basis points at its meeting in March. However, the increases may be even higher in the coming months. Possibility to gain followers by 8.5% inflation which was registered in March. Investors rule it out In December the rate will exceed 2%. Expectation is also reflected in European sovereign bonds, despite the fact that European Central Bank (ECB) Still reluctant to raise interest rates. Spanish 10-year bonds touched 1.9% in the past few hours, Highest since 2017.

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The movement in fixed income has an impact on stocks. Over the past two decades, stock and bond returns have been negatively correlated: When one increases, the other decreases‘, he explains Shawn Markovichanalyzer Schroders. In 2018, the rise in US bond yields coincided with the start of a downtrend in the S&P 500 Index. The index has accumulated a near 7% decline since January, although its value rebounded 3.6% in March. However, Markowicz asserts that ” The current macroeconomic context Politically, it raises some doubts about the possibility of continuing this trend.

In this scenario, inflation plays a special role and distorts trends. In October 2018, the Consumer Price Index (CPI) in the United States It stands at 2.5% and closed the year at 1.9%.. Currently, it is 8.5%, the highest level since December 1981, with expectations that it will not reach its peak. “We think it’s possible Another slight increase in the annual rate Next month, James Caballero, an analyst at ING, said after the latest stats were announced.

“Every time inflation rises, bonds are affected negatively.”, point out from Schroders. This is because interest payments lose their value as prices rise at a faster rate, causing yields to rise and bond prices to fall to compensate. While, Impact on stocks ‘less clear’. “What determines stock behavior in an environment of high inflation is the net effect of higher expected nominal earnings versus higher discount rates,” Markovic wrote.

On this issue, it also highlights The effect of risk preparedness: When is it less, “Investors tend to sell stocks and buy bonds to hedge against recessionsAnd vice versa, but with fears of slower growth and higher inflation, investors may also turn to cash, changing the relationship between fixed return and return on equity. It happened during the 1970s, when the US economy was facing economic difficulties and high levels of inflation,” Markovic states.

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