Tense geopolitics have sent bond yields lower. Investors looking for discounted bonds have no better opportunity than the present day. This is especially true for first world superpowers Germany and the U.S. Bond yields remain suppressed for now, held down by the nervousness over heating relations between North Korea and the west. This is only chief among several other factors.
However, both the economies of the U.S. and Germany are thriving. This offers no real reason for yields to lower to their current standings. Once tensions blow over, the bond markets will rebound. As ACG strategist Larry McDonald puts it, the ten-year yield is “a beach ball under water.” As soon as market nervousness dies down, it will surge much higher.
Earlier this week, America’s ten-year Treasury yield dropped to 2.07 percent. That happens to be its lowest point since November last year. Analysts consider this a temporary position, though. This is due to the strength of the U.S. economy, suggesting that market jitters are all that withhold yield rates.
McDonald cited the political relationship between the U.S. and North Korea on Tuesday. The ACG Analytics strategist was sharing his observations with CNBC. The tensions between the two nuclear-happy superpowers are “driving yields much, much lower,” he explains. In the opinion of his firm, current yields rates are unsustainably low.
Bond yields, for the most part, are driven by the health of the economy. Larger potential for gaining money in other assets, as well as greater projected rates of inflation, often result in greater yields. Considering those metrics, U.S. yields are significantly lower than they should be. The U.S. economy is doing well for itself, holding its footing and with great potential to climb.
There are also other catalysts that are not being factored in, says McDonald. Those, like the incoming tax reform pushed by President Trump, promise to add meat to current yields. Factors such as these are falling to the wayside in the face of geopolitical troubles. The adoption of Trump’s proposed tax reform would have the economy in an even greater position to grow. It could also ignite a bond selling frenzy, as people dispose of their bonds in favor of stocks.
German bond market feels North Korea, too
Germany is also seeing international politics pulling down its bond yield. The country’s 10-year bond yield reduced to its weakest in over 7 days this Wednesday. What is the cause? North Korea’s flex of nuclear power and the impact hurricane Irma on the U.S.
Nuclear tests by North Korea as recent as last weekend have nations on edge. The event sends yield rates plummeting, as evidenced by U.S. and German markets.
The results of these events on the German yields “is clearly not something the European market can ignore”. These are the sentiments of Antoine Bouvet, a rates strategist at Mizuho. Bouvet goes on, stating that the actions of the U.S. Federal Reserve will influence the German bond market, too.
Bond markets in both the US and Germany are temporarily discounted. The novelty of North Korea’s nuclear tantrums are set to fade, though. Yields will subsequently rise.