19.01.2022 – In Germany, the yield on the main German bonds is trading in positive territory for the first time in around three years. In the USA, the yield climbed to pre-Corona levels. If this is not a short-term outlier – and there are currently few indications that it is – the interest rate turnaround has thus begun.
Yields pick up
In Germany, the yield on the ten-year Bund struggled back above zero for the first time since 2019 – the Bunds reached around 0.02 percent. In the U.S., the 10-year government bond yield just rose to 1.865 percent, the highest level since January 2020. Investors should not ignore these signs: Investors are getting out of bonds because they expect governments to have to pay them much higher interest rates soon.
Six or seven rate hikes?
Most U.S. brokers now expect the Federal Reserve to take four interest rate steps. Jamie Dimon, head of the major bank JPMorgan, however, expects even six or seven rate hikes. Over the weekend, star investor Bill Ackman of hedge fund Pershing Square Capital Management had also spoken out, judging that the Fed was losing the inflation battle and would have to raise a drastic 50 points in March to restore its credibility.
Looking at the Fed balance sheet
Morgan Stanley predicted a huge impact on the financial market from the upcoming shrinkage of the Fed’s balance sheet, especially with regard to U.S. government bonds and mortgage-backed securities: “Do not underestimate the effects of liquidity withdrawal. The mammoth balance sheet the Fed has built up was a key determinant of liquidity across markets. As balance sheet runoff is put into motion, the withdrawal of liquidity will have profound impacts. Determining how it plays out is far from straightforward and will be determined by a variety of factors. Understanding the details matters. So hold on tight – there’s volatility ahead.”
Stocks in sell-off
As a result, Wall Street is off to its worst start to a year since 2016. And a few more chart analysis basics: the S&P 500 and Dow Jones are heading south to their 100-day line, and the Nasdaq Composite has even broken lower. The VIX fear indicator moved higher. Investors fled more expensive, interest-sensitive high-tech stocks for cheaper value stocks.
Now much will depend on the reporting season; but the defining issue remains interest rates. “With rates biased higher over the coming months, investors should be prepared for parts of the tech sector to be challenged again,” judged investment firm Principal Global Investors. It added: “Although rising bond yields are challenging the entire tech sector, investors must distinguish between profitless names that are a long way from demonstrating healthy earning power and mega-cap tech firms that can defend their margins.” So we’ll be interested to see how much monetary policy turns the tide. Bernstein Bank wishes successful trades and investments!
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