In the last article, we briefly discussed the important balance between stock and bond markets. In the meantime, capital market interest rates have become noticeably more expensive. One of the world’s most important seismographs, the yield on 10-year US treasuries, rose to about 1.6%. Ultimately, this is nothing more than an expression of a strong economic optimism, but at this level, it has no negative impact, neither on the refinancing costs of companies nor on the interest burden of the highly indebted states or the economic recovery itself.
But what does this mean for the balance of the markets? On the one hand, the relative attractiveness of bonds to stocks is now rising slightly for investors, on the other hand, exaggerations on the stock markets are being corrected. Higher (risk-free) interest rates reduce the present value of future income of the companies and thus their valuation in the mathematical models of professional investors, a causality that, incidentally, will also play a role in pricing of rented property.
Consequently, investors have sold highly valued growth and technology shares, while at the same time a shift from “corona winners” to cyclically sensitive values takes place. These adjustments are to be welcomed for the necessary balance of the markets, and the investment boom in digitalisation, electrification and climate trends is not affected.
Nevertheless, vigilance is required. The bond market is many times bigger than the stock market, and many institutional investors hold huge bond positions in the market. The bond professionals also seem to want to test whether and when central banks will intervene and whether they will be able to influence the long end of the yield curve at all. At the moment, they are more likely to wait. It gets really exciting when inflation gains momentum and central banks are forced to reduce bond purchases on the market.
Price rises can already be noted on the commodity markets. The prices for copper and sugar have doubled in 12 months, and the price for crude oil rose from the briefly negative territory last year to now more than US $66 per barrel. Container freight rates have increased by 40 percent and the money supply of the industrialized countries is also swelling.
However, it is not yet possible to speak of significant inflation, as in particular, strong wage increases are non-existent for the moment. This could only become the case when the forced restraint of the Corona era turns into massive catching-up effects of the consumers (also fueled by the immense liquidity injections of central banks and governments) and a new economic boom reaches the capacity limits of workers and machines. The result would ultimately be strong wage and price spirals.
Our professional investors are well-advised to follow these developments closely and to react flexibly to these changes within an internationally diversified portfolio of all asset classes.