Is the bond market anticipating a stronger economy in the months ahead or is it pricing in the eventual end of quantitative easing? That’s the debate among many bond market watchers, but it appears the latter is most likely the case.
Soaring bond rates the world over have created turbulence for equity prices and are also exacerbating an economic slowdown in several major countries. China is the latest – and potentially largest – casualty in the rate increases. On June 20, short-term interest rates in China jumped 11%; on the same day China’s overnight repo rate increased by an incredible 25%.
Meanwhile the rally in the 10-year Treasury Yield Index (TNX) continues to exert an inverse effect on stock prices here at home. The Dow Jones Industrial Average (DJIA) was down more than 200 points on Monday in response to the 4% (intraday) rally in TNX.
As we’ve discussed in previous commentaries, the transition to higher rates doesn’t bode well for stocks. Nor, if it continues, will it do any favors for the economy.