What's Up With The Bond Markets?

Yields!

And Volatility.

Two of my/our 2015 themes:

1. Bond Markets lead all other financial markets (might this be a prelude to increased equity market volatility?).
2. Central Bankers don't like volatility.

However, while they may not like the long-term impacts of volatility (uncertainty erodes confidence), central bankers are preparing us to expect some in the short-term as economic and financial conditions "normalize".

ECB president Draghi did that yesterday.

German government bond yields have been rising rapidly since hitting lows close to 0% (10 year yield) in April and earlier this morning came close to hitting 1%. Shorter-term yields had visited negative interest rate territory as deflation became a greater a concern and as the ECB continued buying bonds in its on-going Quantitative Easing program. 

Recent economic data out of the Euro area, however has shown improving economic circumstances and a return to higher levels of inflation.

As bond investors adjust their expectations for future inflation, they demand higher yields and this is causing greater degrees of volatility in bond markets:

Interestingly, the International Monetary Fund (IMF) lowered its 2015 economic growth expectations for the US Economy this morning (from 3.1% to 2.5%) , suggesting that the US Federal Reserve should hold off on beginning to raise interest rates until the first half of 2016. 

This comes on the back of the OECD report yesterday (see yesterday's blog).

This touches on another couple of our 2015 themes:

• That stronger US growth will lead the global economy in the 2nd half of 2015 (or will it?).
• That it is expected that the US Federal Reserve will begin raising interest rates in September of 2015 (or not?).

And our "grand theme"  (that throws all expected outcomes out of the window):

Expect the Unexpected!!

Tomorrow is "Employment Data Day" in the US and Canada...

Stay tuned!

www.highrockcapital.ca