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  • Global Bonds In Worst Selloff In 13 Years - How Come?

    Bond investors have had a rough ride in November. The Barclays Global Aggregate Bond Index plunged by 5% during the last two weeks just before and after the election – its worst such drop since March 2003, according to Dow Jones data. When yields rise, bond prices fall, and vice-versa.

    As you know, interest rates have been falling for over 35 years since peaking in 1980. It has been a spectacular bull market for bond investors, that is until just recently. To say that the reversal over the last few weeks came as a surprise to bondholders around the world is an understatement.

    More than $77 billion in assets are benchmarked to the Barclays Global Aggregate Bond Index, according to Morningstar, making it one of the most widely followed in the fixed-income world. It incorporates investment-grade debt denominated in 24 different currencies. Sovereign bonds have historically been the Index’s most heavily-weighted constituent, followed by asset-backed securities, corporate bonds and government-related debt.

    Global bond yields have been edging up since falling to historic lows in late June/July following the UK’s vote to leave the European Union. But the selloff accelerated aggressively after Donald Trump won the US presidential election – an outcome that took most bond market participants around the world by surprise.

    The sharp selloff was predicated on the notion that Donald Trump’s campaign promises to rebuild America’s infrastructure, cut taxes and raise trade barriers, would – if they become reality – drive up inflation, and possibly force the Federal Reserve to raise interest rates much more aggressively than had been expected.

    In just the two days following Trump’s election, global bonds shed an estimated $1.1 trillion in value, the worst rout in a year and a half as investors sold bonds and bought stocks in many cases. The stampede out of bonds propelled US Treasury yields to their highest levels since January.

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  • Some Scary Bumps in the Road Just Ahead

    The major stock indexes moved lower after setting new record highs in early August, although prices have recovered somewhat in the last few days. So was the weakness in August just an overdue correction before moving even higher? Maybe, but there are a number of things coming up in the next month or so that could rattle the markets even more, including whether or not we go to war with Syria.

    Clearly, the stock and bond markets continue to be nervous about the Fed cutting back on its QE bond and mortgage purchases, perhaps as soon as the Fed’s next policy meeting that ends on September 18. There is also some anxiety about who will be the next Fed chairman (or woman).

    Yet there are other upcoming concerns that the markets seem to be worried about, as well they should. Certainly, the continued rise in interest rates is a serious issue for the markets and the economy. The yield on 10-year Treasury notes has soared from 1.6% back in May to near 3%. Long bond yields are nearing 4%. Investors don’t know what lies ahead.

    The markets are also starting to factor in the looming battle in Washington over the federal budget for FY2014, which begins on October 1. President Obama vows he won’t negotiate this time around. Also, there is another battle over the debt ceiling coming by mid-October and yet another threat of a government shutdown.

    We'll look into all of these issues today and how they may affect the markets.

    But before we get into those issues, let’s examine last Friday’s jobs report for August. The White House and the media hailed it as a success since the headline unemployment rate fell from 7.4% to 7.3%. What they failed to point out was the decline occurred because a lot more folks dropped out of the labor market. Truth is, the report was once again a disappointment.

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