U.S. stocks will likely follow the lead from markets around the
world, particularly in Europe, to respond positively to the
reported truce between Russia and Ukraine. It isn't clear at this
stage whether we do finally have a deal or not, but even the move
towards one is a net positive for investors.
All major European stock market indexes responded positively to
the deal announcement. The recent decline in government bond
yields, particularly beyond Germany, has been due to the region's
deflationary spiral that is pushing the European Central Bank (ECB)
to come out with a more forceful monetary policy response (a QE of
their own). As a result, Spanish, Italian and other government bond
yields have reached record low levels lately.
The safe-haven trade into German government bonds has started
unwinding following the Ukraine deal news. But they remain
extremely low despite today's uptick. After all, German government
bond yields are in negative territory for up to three-year maturity
and under-1% for the 10-year maturity.
Government bond yields this side of the Atlantic have started
going up as well, but the catalyst here seems to be the delayed
realization of the changing macroeconomic backdrop. Yield on the
10-year treasury bond closed Tuesday notably above the Friday level
following the surprisingly strong manufacturing ISM survey.
The uptrend in yields appears to be in place for today's session
as well, though it will be interesting to see if the trend will
accelerate following a good jobs read on Friday. That said, we
shouldn't lose sight of the fact that yields are at such low levels
that it will be a while before they reach even remotely menacing
Many of us had been surprised by the recent downtrend in
treasury yields in the face of stronger economic data. The move was
plausibly explained by safe-haven trades and global central bank
purchases. But confirmation of this trend reversal in response to
stronger economic data will make even more sense. Importantly,
yields still remain low enough not to be a worry for stock market
investors… at least not yet.
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