Not all investors are fretting about sharply higher US bond yields. Bond king Jeffrey Gundlach is among those who are “much happier” now.
Investors are braced for more violent swings this week as two strong but opposing fears continue to buffet global financial markets.
Worries that US and global economic growth could brake sharply, which would dent demand, triggered the vicious sell-off in the oil market mid-week, which led to prices plunging by more than $US5 a barrel. At the same time, long-term US bond yields dipped slightly.Financial markets are likely to remain extremely volatile while these two strong but contradictory forces dominate, with US bond yields climbing when worries over the government’s yawning budget deficit are in the ascendancy.
But the Fed has now changed tack. It’s no longer the stalwart, price-insensitive buyer of US government bonds and mortgage-backed securities it once was.Instead, it is reducing its balance sheet by allowing $US60 billion of US government bonds – and $US35 billion of mortgage-backed securities – to mature each month, without investing the proceeds.
But as they contemplate the relentless pressures pushing US bond yields higher, investors are also conscious that sharply higher borrowing costs risk triggering a deep recession.Already, the US consumer is feeling the pinch as the jump in bond yields has pushed mortgage rates to the highest level in 23 years, at more than 7.5 per cent for a 30-year fixed-rate loan.
Higher US bond yields are also buoying the US dollar, which has climbed close to 4 per cent against a basket of other currencies since the beginning of August.
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