The world market for government debt is the largest in the world. In 2019, its size was estimated at USD 105.9 trillion, while the global stock market capitalization was USD 95.0 trillion, according to Sifma.org. Thus, changes in bond prices may also be significant for other markets.
What has recently happened on the bond market and how could it affect, for example, currencies and stocks? Well, it seems that with the information about the invention of an effective vaccine for COVID-19, investors stopped playing for further interest rate cuts in the United States, but also in other parts of the world. As a result, it seems that the boom that has lasted for many years on this market has come to an end. The investors, having no arguments for further trading for interest rate cuts, could get rid of the bonds and make profits. This in turn may create a huge supply, which in turn is absorbed by central banks through their asset purchase programs, including government bonds.
Meanwhile, with the money raised from the bonds, after realizing potential profits, global investors could buy other assets: stocks, commodities or cryptocurrencies in the hope of economic recovery. The possible realization of profits on the world's largest market may cause a huge boom on other markets, and all this until the yields increase enough to compete with risky assets. Currently, the interest rates on 10-year US bonds exceed only 1 percent, which, with inflation expectations above 2 percent, may still indicate negative real interest rates.
If the rise of U.S. bond yields will result from the prospects for economic growth in the USA, it may also contribute to the value of the U.S. dollar. According to CFTC data and the COT report, USD index futures have the fewest net long positions since 2011. This means, in turn, that futures contracts may indicate a significant oversold, which in turn may provide a correction.
As a consequence, a fall in bond prices in the US may on the one hand lead to the flow of capital to other markets, but also an increase in their interest rates may lead to a correction on the dollar. Thus, it could mean a correction in the trends that seem to be in effect from March on currency pairs with the USD.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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