The Fed Flinches| The Big Conversation | Refinitiv

TL;DR

The Fed's interventions have led to distorted asset prices, making it difficult to gauge market signals. The US bond market may provide insight into future economic direction.

Transcript

Many assets have displayed a high level of volatility in recent sessions, so it's perhaps inevitable that the Fed would step in again to soothe markets. U.S. bond yields have been trapped in a narrow range, though they have attempted to break higher in the last couple of weeks. There are very few assets that are not being manipulated in some way, b... Read More

Key Insights

• 📼 Distorted asset prices make it challenging to gauge clear signals in the market.
• 🧑‍⚕️ The bond market, despite central bank interventions, can still provide insights into economic health.
• ⏮️ The different pattern of bond yield inversions last year compared to previous recessions highlights the uniqueness of the current recession caused by COVID-19.
• 📭 Lower bond yields indicate lower global growth, which can impact open exporting economies like South Korea.
• 🦿 If bond yields take another leg lower, emerging market risk assets and commodity prices may weaken.
• ⚖️ The Fed's actions are crucial for equity markets, as their balance sheet expansion affects sentiment.
• ✋ Retail investor interest in struggling companies can create market froth, especially when orders are routed through high-frequency trading platforms.

Questions & Answers

Q: Why is the bond market considered an indicator of macroeconomic health?

Bonds yields can reflect slowing growth and increased corporate insolvency risk, which are significant downside risks to the economy. If bond yields fall, it indicates lower global growth.

Q: Should bond yields be used as an indicator of economic health, given central bank interventions?

While central bank interventions can distort bond yields, they could still reflect weakness if real growth slows and corporate insolvency risk rises. Thus, they remain relevant indicators.

Q: How have bond yields behaved recently?

The US 10-year yield briefly reached one percent before returning to previous levels, while the 2-year and 5-year yields have been flirting with their lows but have not broken down yet.

Q: What would happen to risk assets if bond yields decline further?

If bond yields break down, emerging markets and commodity prices are likely to weaken, as they have a higher beta to growth. This could also affect currencies like the Australian dollar.

Summary & Key Takeaways

• The Fed's corporate bond buying program and fiscal infrastructure scheme calmed markets after recent volatility.

• The US bond market is important to watch as it can provide indications of economic health, despite being influenced by central bank intervention.

• Last year's decline in bond yields differed from previous inversions, and the current recession caused by the COVID-19 pandemic was not predicted.