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US bond market traders’ surprising turnaround amid yield paranoia

US bond market traders don’t seem to have the courage of their collective paranoia about yields. After filling reams of paper, the airwaves of TV business shows, and online commentaries with dire predictions about what would happen when US 10-year bond yields breached the ‘psychologically important’ 5% level, they turned around and bought heavily, driving the yield sharply lower by the close of trading on Monday.

In fact, the yield on the 10-year note topped out at 5.022% on Monday morning, US time, and then started retreating to end the session around 4.84%, down just over 7 points from Friday’s close but off around 18 points from the day’s high (which was a new 16-year high).

The rise past 5% hit commodity prices, led by oil (which fell more than 2%) and gold (Comex down 0.5%), and had some impact on shares, with the Dow and S&P 500 down while Nasdaq was up.

However, equities aren’t the primary focus in today’s markets; it’s all about interest rates, bond yields, and the games played by noisy, publicity-conscious fund managers, particularly those running hedge funds.

Many of these people have a view, but it’s often no view at all because the market doesn’t listen and can turn against them at any moment.

It’s as though bond traders (often dubbed ‘vigilantes’ in headlines on Reuters, Bloomberg, and in business media) were like a dog chasing a car and, when they finally caught it (as it slowed), they wondered what to do next.

Yes, worries about the Middle East, oil prices, inflation, and rate hikes are all contributing factors to the recent fluctuations in yields. However, pushing rates past 5% seemed senseless because it lacked an end game once the breach occurred.

Political instability in the US is likely another significant factor, especially with a looming November 17 deadline for the US government potentially running out of money and shutting down (risking its remaining AAA credit rating from Moody’s).

While the sell-off in bonds pushed yields higher, bond Exchange-Traded Funds (ETFs) and other vehicles have been buying these securities to lock in historically high yields. According to major managers, hundreds of billions of dollars have flowed into these funds in recent months.

Cash, of course, is generating attractive, secure returns, with the sector average currently at 5.33%, up from 2.33% a year ago.

So, when the smoke clears and current fear levels ease, and investors look around for new opportunities, will they realise that there are many investors holding bonds with yields ranging from 4% to 5% for quite a while to come?

Currently, yields in the US from Treasuries and money market funds are higher than inflation. This may not always be the case, but it certainly offers a more stable alternative to agonising over the price movements of Apple, Tesla, or Amazon shares, or the fluctuations in gold and oil prices.

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