Bond yields are heading up


By Christophe Donay, Chief Strategist at Pictet Wealth Management

The rebound in equity markets since the beginning of October, looks largely played out, with further gains dependant on a turnaround in earnings forecasts. Yields on DM sovereign bonds are catching up with the wider market rally, as fears about deflation have dissipated and a first Fed rate rise is now likely in December. With the ECB set to loosen policy further, the euro should weaken against the dollar.

Equity markets are set to trade sideways

The rebound in equity markets has played out as expected since the beginning of October, after excessively negative perceptions about the global economy, notably China, abated. Data continue to confirm broadly robust global economic fundamentals, even if growth lacks momentum.

The S&P 500 has now moved back into the trading range (roughly between 2050 and 2120) that it occupied from February to August, while the Stoxx 600 has reached the lower bound of its range for the same period (around 380 to 410). Falls this week in anticipation of a Fed rate rise in December are unlikely to herald a major reversal; conversely, further gains will be limited for as long as downwards revisions to earnings forecasts continue.

Bond yields catch up with the rally

Sovereign bonds lagged the equity market rebound, with yields on 10-year US Treasuries initially rising only gently. Until recently, fears about deflation, linked in part to lower oil prices, were still dampening long-term interest rates.