Bond yields continue their march up

10 year US Government bond yield tops 5%
Strong jobs’ market data in the US, economy still largely resilient
Israel‑Gaza war has had little direct effect, so far

During October, the financial markets have born witness to the ongoing bond market rout and the ensuing repercussions of the most‑followed bond yields. Ironically, the investors are getting more accustomed to the idea of “higher for longer” message reiterated by the main central banks, seemingly adjusting the asset prices in order to reflect the interest rates staying high not just in the short term, but potentially for longer period, too. As a result, the yields on the US 10 Year Treasury bonds have touched 5% for the first time in many years (4.57% a month ago), while German sovereign 10 Year Bond yields have actually declined to 2.78% (2.84% a month ago). With that in mind, the developed markets’ stock index MSCI World has retreated 3% and emerging markets’ stock index MSCI Emerging Markets has dropped 4%.

Middle East in chaos again

Previous month will be remembered for yet another round of violence in the seemingly never‑ending Israeli‑Palestinian conflict. In the wake of multiple terrorist attacks on the Israeli settlements and cities, the Israeli state has retaliated with a major offensive on the Palestinian‑controlled Gaza strip. As the terrorist attack and the response stood out in terms of casualties and damage done, regional and global powers have warned against the conflict potentially spreading to neighboring countries. The prospect of that has apparently pushed the oil prices up as the tensions escalated throughout the month, although it must be admitted the conflict, so far, has had little effect on the global financial markets, hence the highly‑diversified portfolios of the Discretionary Portfolio Management service have remained largely immune to the Middle East tensions.

Bond yields continue their march up

Contrary to the many predictions a year ago, the global economy is not easily succumbing to the historically steep hike in the global interest rates. Thankfully, leading economic regions are showing stubbornly low unemployment and GDP growth figures mostly staying above zero, although the variation in between the major economic blocks are vast. The leading economy in terms of upside economic surprises is the USA, which has shown unexpected resilience in the face of the challenges thrown at it. While otherwise that may be very much welcome news, the markets are fixated on the central banks’ ongoing battle on inflation. Looking through these lenses, a resilient economic activity and labor market tightness may signal ongoing support to still‑elevated inflation levels, which may require central banks to retain the current high interest rates for longer or even consider increasing them. Therefore, the mostly optimistic surprises on the economic front has caused some investors to suspect that these development could after all really result in “higher for longer” interest rates. While the bond yields have been reaching for the above‑mentioned highs, the investors were in a steep structural shift mode, as if re‑adjusting their previous expectations that interest rates would stay high for a quarter or two, only.

USD 10 yr Treasury yield

Source: Investing com

Companies starting out their reporting season

In October, many companies were reporting their earnings for the 2023 Q3, which in turn have affected the dynamic of the financial markets. The expectations for the current season were not set too high and the base‑effect for the economic activity should have looked less challenging, as the companies started reporting lower guidance coupled with slower sales and profits in droves in the second half of 2022, hence the comparisons could show some pick up in the business activity. Having said that, some optimistic twist in the company reports has already been expected by the market, as the price multiples have largely stayed higher in recent months. In other words, the earnings’ season is likely to stay optimistic, but that may be already priced in the current valuations. The expectation has at least partially materialized, even though the earnings’ reporting season was not over as this publication was being prepared for publishing.

Market view

The Luminor investment team is witnessing the slight increase in competitiveness in fixed income versus equities. That is mainly thanks to the increased yields on bonds. Although equities far outweigh the increased yields by expected returns, the still‑uncertain prospects of global economic activity supports slightly more conservative market positioning with a minor preference to fixed income.

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