The key talking point in the markets has been government bond yields, which continue to climb to new highs on the year. Yields have been rising with the pace accelerating since the turn of the year, with those of the Antipodean nations leading. Hence, the New Zealand and Australian dollars have been among the best-performing currencies. Canadian yields have also been outperforming, which underlines why the Canadian dollar has been among the star performers. Only German yields remain below zero on the 10-year debt, but with the rest of European yields above this threshold, bund yields could follow suit:
Source: ThinkMarkets and TradingView.com
Rising yields are not good if you are bullish on gold and to a lesser degree silver, as this increases the opportunity cost of holding assets that pay no interest or dividends, such as precious metals.
But what about the stock markets?
Well, it is without a doubt that rising bond yields are starting to erode the attractiveness of stock markets. The dividend yield on the S&P 500 is estimated to be around 1.5%, close to what the 10-year bond is paying. So, if bond yields continue to rise, this could be bad news for stocks, as yield-seeking investors could make equally good or better returns by holding longer-dated government debt.
Obviously, banks being excluded because lenders tend to rise in share value when interest rate expectations are on the ascendency. This is because charging interest is banks' main source of income.
But central bank heads are continuing to dismiss early taper talks and tightening cycles. Central banks are historically always behind the curve. Most tend to have a reactionary policy response rather than anticipatory one to changing market conditions.
However, could the bond yield rally continue? Well, a lot depends on how the economy evolves in the coming months. If things don’t turn out to be as rosy as the markets are currently expecting, then this could be a reason for yields to drop back.
Meanwhile, taking a closer look at the US 10-year chart, one can see that yields are approaching the next key level at 1.500% which was previously support. It is possible this level could offer a bit of resistance.
Source: ThinkMarkets and TradingView.com