- The dominant theme for financial markets in 2018 has been a lift in global bond yields, particularly in the US.
- After making two forays above 3% in recent months, yields on benchmark 10-year US notes are now sitting at around 2.94%.
- A reasonable relationship exists PMI reports and movements in US bond yields, hinting that upcoming releases may proove influential on not only bond yields but also broader financial markets.
While geopolitics have stolen the limelight from time to time, especially in recent months, the dominant theme for financial markets so far this year has been a lift in global bond yields, particularly in the US.
After making two forays above the 3% level so far this year, only to be hammered lower, many are now asking what will happen next for benchmark 10-year bond yields.
Will they convincingly break above 3% and stay there, setting the course for further gains in the second half of the year as the Fed continues to hike interest rates US budget deficit widens, or will the recent range be maintained, providing relief for emerging markets and other riskier assets such as that which have come under pressure recently?
The market, at this point, is divided.
Perhaps the answer will come from the release of purchasing managers indexes (PMIs) from the US, European Union and Japan in the months ahead.
As seen in the chart below from Topdown Charts, a fairly good relationship exists between composite PMI reports from these nations and regions — combining manufacturing and services readings — and US 10-year US bond yields.
Providing a near real-time snapshot of economic activity in developed markets, it suggests that PMIs have some influence over movements in US bond yields.
Recently, flash composite PMIs have weakened noticeably, particularly in Europe, perhaps contributing to the reversal in US 10-year yields that have fallen from 3.13% on May 18 to just 2.935% today.
Given the relationship between the two, along with the influence that bond yields have exerted on broader asset markets this year, one suspects that these reports will garner plenty of attention in the months ahead.
Final PMI reports for May will be released in early June.
You can find plenty of other information from Topdown Charts here.
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