Further rise in bond yields seen; oil likely at $100/barrel

The 10-year and 30-year US Treasury finished at 1.34 per cent and 2.13 per cent, respectively, last week.

The rise in US bond yields spooked investors last week and there could a further increase given the inflation dynamics, according to Christopher Wood, global head of equity strategy at Jefferies.

“The US bond market sell-off has continued over the past week, and with it the increased potential for an inflation scare.

"Still, there is plenty of scope for bonds to sell off more since the last time the 5-year forward inflation expectation rate was running at current levels (namely in early December 2018), the 10- and 30-year bond yields were significantly higher at 2.91 per cent and 3.17 per cent, respectively,” the market guru said in his newsletter GREED & fear.

The 10-year and 30-year US Treasury finished at 1.34 per cent and 2.13 per cent, respectively, last week.

At the start of the month, the 10-year was at 1 per cent and 30-year was at 1.8 per cent.

Woods said bond prices could be supported by the Fed and “bond bulls” who have been using the dip to buy.

He said the buying interest wasn’t surprising as on many occasions since the 1980s most inflation scare in the US have been false.

This time around, Wood is taking the inflation scare “seriously” due to post-Covid reopening.

“If the anticipated inflation surge on the reopening is not met with a committed return to monetary policy orthodoxy then, in GREED & fear’s view, the odds will have grown dramatically, that inflation will start trending higher on a longer-term basis, accompanied by a trend change in velocity,” Wood said.

He said the only risk to this outlook was “a surge in new Covid variants against which vaccines prove ineffective.”

Besides rising yields, Wood’s forecasts on oil prices would likely to scare India market bulls. “…the oil price can definitely surprise on the upside, with GREED & fear easily anticipating a $100-plus oil price if the health fascists ever allow the world to reopen again; the same also applies to copper,” he said.

“Oil consumption in China has made new highs despite the pandemic, while consumption in India has of late rebounded to near pre-Covid levels.

"Indeed, despite all the talk of the end of fossil fuels, oil demand is back running at 94-95 million barrels per day (mbd), only 5-6 mbd below the all-time peak of 100 mbd level recorded in 2019.

"That gap is almost entirely explained by a decline in jet fuel demand.”

In the newsletter, Wood also highlighted the sharp rise in prices of other commodities (barring gold) due to supply-side issues.

The Bloomberg Agriculture Price Index and the Bloomberg Industrial Metals Index have risen about 7 per cent and 10 per cent, respectively, this year and are now 50 per cent and 62 per cent from their 2020 lows.

Photograph: Lee Jee-Won/Reuters