Wednesday, December 14, 2016

Bond Rout To Continue

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*As growth and inflation pick up, bonds have downside.

*Bonds are still artificially held up by central banks, making them overpriced versus historic standards.

*Central banks are giving bond investors a window to exit. When central banks sell, look out.

Bonds have more downside. Growth and inflation are picking up while bond yields are still near all-time lows. This is a relationship that likely has only just started to correct.
Bond Yields Versus GDP

Above you see 10 year Treasury yields in red versus the GDP rate in blue. Historically bond yields and GDP move up and down together.
You can see where we circled that the two data series converged to a record historic level.
The jump in GDP surprised bond yields to start moving higher.
Higher GDP means more growth. More growth means you can find better returns outside of bonds so bond yields need to adjust higher.
Based on this one chart it looks like bond yields are too low when compared to GDP in general and especially when the latest move in GDP was upwards.

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