Financial market stability rests on steady bond yields
Tuesday, December 29, 2020
Significance
Furthermore, liquidity injections by central banks are supressing bond yields. However, even a hint from major central banks that inflation is picking up faster than anticipated could roil stock markets, whose lofty valuations depend on yields remaining ultra-low.
Impacts
- A communication blunder by a major central bank could exacerbate any bond market volatility and cause a sharp sell-off in equity markets.
- More transmissible coronavirus strains are reaching more nations and reigniting fears about the speed and efficacy of vaccine rollout.
- A record USD18tn of public and corporate debt is yielding a negative return, fuelling demand for higher-yield EM bonds and currencies.
- The trade-weighted dollar has fallen by nearly 4% since end-September to the lowest since April 2018; it is set to stay under pressure.