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Five reasons you shouldn’t panic about yield drops

Shane Oliver

It’s been a turbulent week in some quarters of the market, but investors shouldn’t hit the panic button just yet. AMP Capital’s Shane Oliver explains. 

This week, there was a plunge in bond yields, but here’s why you shouldn’t be too concerned:

1. While a negative yield curve has preceded past US recessions, the lag averages around 15 months. There have been numerous false signals and following yield curve inversions in 1989, 1998 and in 2006, shares actually rallied.

2. Other indicators are not pointing to imminent global recession. In particular, we have not seen the sort of excess – over-investment, rapid debt growth, inflation, tight monetary policy – that normally precedes recession.

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3. Bond yields lag shares, with the bond market catching up to last year’s growth scare that depressed share markets. Following the February 2016 low in shares, bond yields didn’t bottom until July-August 2016.

4. The retreat from monetary tightening has been a factor behind the rally in bonds, but this is actually positive for growth.

5. Part of the reason for the rally reflects investors unwinding expectations that central banks would continue pushing towards tightening. What the decline in bond yields reminds us, though, is that the constrained growth and low inflation malaise seen since the GFC remains alive and well.

The latest plunge in bond yields will keep the “search for yield” going for longer, which is positive for yield sensitive investments like commercial property and infrastructure.

That said, if the momentum of global data – particularly global business conditions PMIs – doesn’t soon start to stabilise and improve as we expect, then the decline in bond yields will start to become a deeper concern. Either way, share markets remain vulnerable to a short-term pull back.

Five reasons you shouldn’t panic about yield drops
Shane Oliver
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