16. November 2016 10:21
Bonds are turning down. Neither the Fed nor Trump are the problem: it’s the economy – the Chinese economy. Reversals in Chinese cost deflation and Chinese flight capital are currently having bigger impacts on G4 government bond markets than either Central Bank policy actions or expectations about President-elect Trump’s new fiscal policy. Bond yields were rising prior to Trump’s Election and the major Central Banks still talk as though they can control bond yields through QE policies. Yet, China matters far more through the People’s Bank, via the ebb and flow of flight capital to the West and from domestic cost pressures. In this report, we argue that these China trends point towards rising bond yields and steeper yield curves. This has been hard to see because Asia, and unusually not the US, is leading the global credit cycle.