Well you’ve learnt something important – the markets determine your mortgage and pension. Got it? It’s one reason I have my campaign to teach a million people to be better investors on www.campaignforamillion.com
You may have missed the name of an important British Indian in the Chancellor’s emergency statement on Monday.
He mentioned a hedge fund manager who would join his new Council of Advisors. This makes sense given that the markets fought His Majesty’s Treasury and First Lady of the Treasury Truss – and the markets won. The Treasury did not realise how markets, specifically bond markets would react.
So let me explain them to you. Oh, that name – Sushil Wadhwani.
And it’s the UK and US facing this problem.
The bond market had a turbulent week, with yields on the 10-year Treasury note (a loan to the US Government) reaching their highest level since 2014. Remember the way a bond works (it’s a loan with a fixed interest rate) is that as the price of the bond drops, then it’s effective yield goes up. You’re Indian, think of it as a property paying a fixed rental income per annum. If the price of the property drops, the yield goes up.
This volatility is being closely watched by investors as they try to gauge its impact on the stock market.
Some believe that the sell-off in bonds is a sign that stocks are headed for a correction, while others argue that it's simply a healthy rotation out of low-yielding assets and into riskier investments.
So what should investors make of all this? Here's a closer look at what's going on in the bond market, and what it could mean for stocks.
What is causing the bond market turbulence?
Former finance Minister Kwasi Kwarteng's “mini-budget” announcement on Sep. 23 sent shockwaves through the bond market.
The U.K. government's plans to increase spending and borrowing to fund a post-Brexit economic recovery sent yields on 10-year gilts soaring to their highest level since June 2016, while the yield on 30-year gilts hit their highest level since 2014.
The move came as a surprise to investors, who had been expecting the government to stick to its previous plans for fiscal austerity.
The announcements had a disastrous impact on the stock market, with the FTSE 100 tumbling and 41% of mortgage deals pulled in the wake of the news.
At the end of October Bank of England plans to begin its delayed sale of gilts as part of its quantitative easing program, which is likely to put further upward pressure on yields.
Over the pond, the bond market volatility is at its highest levels since the 2008 financial crisis in the U.S as well. With the Fed accelerating the reduction of its $9 trillion balance sheet, this is likely to put upward pressure on yields and further widen the gap between short-term and long-term rates.
So what does this all mean for the stock market?
Well, higher bond yields typically means increased borrowing costs for companies which can weigh on profits and share prices. It can also make stocks look relatively less attractive compared to bonds from an income perspective.
That said, it's important to keep in mind that the bond market is just one factor that can impact stock prices and there are many other factors at play as well.
So while bond market moves can be closely watched, it's just one piece of the puzzle when it comes to analyzing the stock market.
The stocks-to-bond correlation is not as simple as some make it out to be. While a rise in bond yields can put pressure on stocks, it's just one factor among many that can impact stock prices. So while bond market moves are worth watching, don't forget to consider the big picture when making investment decisions.
For me, I’ve buying buying UK bonds and indeed their price has been rising since the mini-budget. Think of it this way – it’s a property and the UK Government the tenant. Are they good for the rent? Yes. Can I do other things with the money than buy the bond (ie the property), well this is one of the things I can do and then I will flip the property (bond) and make a quick gain. That’s what bond traders and I have been doing. We’ve been buying UK Government bonds for the past couple of week and thereby reducing yields and so your mortagages in all likelihood and calming the markets down and doing what the Government wants – buying bonds! You’re welcome Britain! It’s why Sushil, a fellow hedge fund manager, is advising the Chancellor. This stuff is easier for us to understand!
