By Ye Xie, Bloomberg macro commentator
There is some uneasiness seeping into the bond market.
Yields on 30-year Treasuries rose to the highest in five weeks after an auction disappointed. Higher yields are also consistent with the recent better-than-expected data, including the jobless claims and CPI. While the Fed will need to keep yields low to support the economy, there may be air pockets occasionally for rates to rise amid heavy bond supply and when data points to a cyclical recovery. If Friday’s retail sales exceed expectations again, it may add further pressure to the bond market.
In a sense, central banks are implicitly guaranteeing low rates for governments to borrow. This monetary-fiscal coordination is required because "printed money can make it into the hands of those who need it through the fiscal package," Karen Karniol-Tambour, head of investment research at Bridgewater Associates, said in a Bloomberg TV interview.
In this new era of near-zero rates and quasi-monetization of debt, nominal bonds are a lot less useful in one’s portfolio, while gold and inflation-linked bonds have added value. Another feature of the current investment environment is that a more segmented world adds a sense of urgency for asset diversification. She said:
“When you are having a lot of pressure around fragmentation, pressure on companies to have their production be more localized, pressure to think through whether you will be allowed to move things across borders, and something that could turn into outright conflict, it is not a sensible time to say ‘let me have my investments in just one of the three poles’” of the U.S., Europe or China.
Chinese policy makers seem to be responding to both paradigm shifts - zero rates and fragmentation - a move that would encourage capital inflows to the nation’s markets. First,
- China has repeatedly pledged not to follow the developed world and pursue unconventional policies. Its 10-year bond yield, at close to 3%, stands tall for an A+ rated country.
- Second, President Xi Jinping has made a strategic shift to a so-called “dual circulation” strategy, emphasizing self-sufficiency in supply and demand. Already, Chinese defense, consumer and satellite stocks have outperformed lately.
The investment conclusion is easy: "I would recommend building the best portfolio you can with China bonds, because the rates are higher, and whatever collection of Chinese stocks you can put together to best reflect what that economy is like, including some national and local brands," Karniol-Tamboursaid.