Global bond yields are set to continue their rise, and there’s an increasing risk they could spike further and catch markets off guard, Credit Suisse says.
Equity analysts Hasan Tevfik and Peter Liu maintain their view that bond yields will continue to increase as central banks reduce their asset purchases.
And the pair’s latest research note provides an update on their Bondcano investment theme, highlighting which Aussie stocks are set to benefit from rising bond yields — and which aren’t.
After a barnstorming start to the year, global stock markets have wobbled this week as markets increasingly focus on the prospect of rising bond yields.
The US S&P500 just had its biggest two-day fall since August last year, while benchmark US 10-year bond yields are trading at 2.73% — the highest level since April 2014.
The ASX200 wasn’t immune to the market jitters yesterday, and futures traders have marked down the local index again this morning after another overnight selloff.
As Business Insider’s David Scutt pointed out yesterday, it’s not uncommon for stock prices and bond yields to rise simultaneously — at least for a while. And Tevfik and Liu agree:
“Rising bond yields from low levels have yet to be the headwind for stock markets. Rather it has been a signal of continued recovery and expansion,” the pair said.
However, “rising bond yields from higher levels could be more material headwind as they will highlight tight liquidity conditions”.
Tevfik and Liu noted that Australian and US government bond yields have already risen by 20-30 basis points this year.
The pair’s latest research summarises which ASX-listed companies have been the worst performers in the wake of a rapid spike in government bond yields:
“Those stocks that have under-performed the most when bond yields have increased tend to have a combination of high price/earnings ratios, high payout ratios and weakening growth prospects, or are gold producers,” Tevfik and Liu said.
The pair also highlighted ASX companies which have the opposite set of characterists and typically benefit from a jump in yields.
While gold miners topped the list of worst-performing stocks, commodity-linked companies such as Bluescope and BHP are among those who benefit most:
The Credit Suisse fixed income analysts is forecasting that US 10-year bond yields will finish 2018 at 2.9%, but “the prospect of an overshoot looms large”.
“The outlook for the developed world government bond market continues to be one of falling demand and rising supply,” Tevfik and Liu said.
They said the US government is set to ramp up its issuance of government bonds to fund higher deficit in the wake of the latest tax cuts:
At the same time, the US Federal Reserve, the People’s Bank of China and the European Central Bank are all in the process of reducing their bond purchases and decreasing the size of their balance sheets.
Following the recent rise in bond yields, Tevfik and Liu said stock investors would be well-advised to pay close attention to the bond market this year.
“While the sharp increase suggests potentially some consolidation ahead, we believe investors should tread cautiously around the Bondcano, as there are more eruptions ahead, in our view.”