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ChartBrief #32 This is Not a Tantrum

December 5, 2016

US 10-year treasury yields are now up over 100bps since the bottom in July. Indeed, from July until November, US 10 year government bond yields had been steadily tracking upwards - it was only until the election result was known that it really got going.  And hence some people are calling the bond market selloff the "Trump Tantrum".  But there is a lot more going on, and it's fair to say that this is not your average run of the mill bond market tantrum...

A couple of forces are at play, the first and most stark is the turnaround in the global manufacturing PMIs - particularly in the developed economies.  Indeed the chart above shows how the move up in bond yields has been lead by and effectively justified by the improvement in the global economy.  As I've pointed out previously, it also represents a break of the downtrend that the PMI had been in. So a key driver of the bond selloff is the growth turnaround - i.e. higher yields are here to stay.  

 

The other aspect is the rebound in inflation; as growth picks up, capacity utilization tightens, commodity prices rise, and base-effects kick in, it's likely that we will start to see higher inflation globally and especially in the US.  This means an end to additional central bank easing, and thus we have another bearish factor for bonds.  

 

So don't call the bond bust a "Trump Tantrum" without pointing to this chart and saying that Trump was merely a catalyst in an existing and fundamentally driven trend.

 

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