Chart of the Week - Bond Yield Outlook
Chart of the Week - Bond Yield Outlook
After a shocking run for bonds in 2022, an interesting scenario is unfolding into 2023...
Check out the full archives of the Chart Of The Week for more interesting charts.
Chart of the Week - Bond Yields Going Down!
Bond Yields vs the PMI: As alluded to in the section on treasuries in our latest report, one impact of a weakening growth outlook would be relief for bonds (our base case is a sharp global economic recession into early-2023).
The latest developed markets flash manufacturing PMI [Purchasing Manager’s Index — a good real-time gauge of the economic pulse] dropped further into contractionary territory during November, which is a clear indication that the economic slowdown is already underway.
If we take the chart below of bond yields vs the PMI literally… it is pointing to the US 10-year treasury yield dropping back below 1.5% (!).
I do wonder though if it ends up like the closing of the previous gap, where it took quite some time before bond yields caught up to the PMI (indeed it was around this time last year that we outlined the clear and present upside risks to yields …now things have come full circle!). In other words, maybe there will be a delayed reaction for bond yields to catch down to the currently collapsing PMI.
But one thing I am certain of is that if we do get a proper full-blown recession, bonds will perform well in absolute terms, and will actually perform their usual diversification role this time around (as opposed to both stocks AND bonds falling in 2022).
Key point: Bond yields are likely to fall further in the event of recession.
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Topics covered in the latest Weekly Insights Report
Aside from the chart above, we looked at several other charts and key issues facing investors at the moment:
Leading Indicator Meta Analysis: combining all our leading indicators.
Treasuries: looking at valuations, sentiment, macro models, technicals.
EM Bonds: reviewing why we think investors are wrong to overlook this.
EM Stocks vs Bonds: perhaps unexpected conclusions on the outlook.
WTI Crude Oil: focusing in on the macro-technical backdrop.
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Callum Thomas
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