Explainer: Why higher wages are whacking global stock markets

Says that HSBC sees the best-risk reward is in U.S. 2-year notes, and that Treasury yields at current levels present a good buying opportunity.

Foreign indexes were down across the board as worries over inflation and rising U.S. Treasury bond yields swept through financial markets. This pushed up United States bond yields sharply, which in turn hit equity investor sentiments.

Investors are also nervous about bond yields as the Treasury is due to significantly increase issuance this year to make up for declining Fed purchases.

I find it perplexing that they don't believe that movement in the bond market will even have the slightest impact on the equities market. Central banks around the world lowered rates and pushed down yields on safe government bonds, part of an effort to help economies limp their way out of the Great Recession. Central banks wanted to heal their economies.

That was the reason why bonds yields had soared in many European economies such as Italy and Greece during the debt crisis a few years ago.

Faster rate rises by the Fed would hurt emerging markets and commodity currencies, said Deutsche Bank macro strategist Alan Ruskin.

"It is hard to see the 10 year US Treasury breaking much above 3 to 3 ¼% without a sustained increase in inflation, which would raise expectations of more aggressive central bank tightening".

So as bond yields keep on running up and equity markets continue to fall, you are getting whacked on both sides.

After a decade of easy-money policy that cut bond yields to nearly nothing and lifted US stock markets to records, companies that pay big dividends now look among the most exposed as Federal Reserve interest rate rises pull returns on government debt higher.

Jim O'Neill, Former Commerce Secretary in the United Kingdom government, on Monday said the USA is growing and the central bank may need to tighten monetary policy faster than the market has perceived.

Stock markets were routed around the globe on Monday, with European indexes opening lower and bond yields rising as resurgent USA inflation raised the possibility central banks would tighten policy more aggressively than had been expected.

Investors are afraid that the recent rise in USA wages means inflation is on the way. A rise commodity prices also raises inflation.

I do not think the NZ economy has improved so much compared to the USA to justify our bonds trading at an interest rate on par with U.S. bonds. Inflation here we come! But the relationship between breakeven inflation and the oil price has shifted over the past 14 months, as we see in the chart below. That augurs for a gradual and limited rise in interest rates, rather than a disruptive change.

"We have an environment where interest rates are rising". It is preparing markets for two-to-three rate hikes, so that it can actually deliver one or two.

However, rising bonds does not always lead to poor equity performance.

The S&P 500 dividend yield has been at around 2 percent for the past nine years, drawing investors looking for dependable returns. It's not surprising that higher bond yields are upsetting the equity outlook, we knew that would be a risk in 2018.

In a statement following the two-day policy meeting, the Fed said "inflation on a 12-month basis is expected to move up this year", predicting it will stabilise around its 2% target over the medium term.

So if you still think a 10 per cent long-term capital gains tax is what is hurting Dalal Street?

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