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In a flash, US yields hit 1.6%, causing chaos across the markets

(Bloomberg) – After weeks of grumbling, the world’s largest bond market spoke loudly and clearly on Thursday – growth and inflation are rising. The embassy devastated the risk assets. 10-year government bond yields soared to over 1.6%, their highest level in more than a year, and traders preferred their opinion on how quickly the Federal Reserve will be forced to tighten its policies. Equities fell as higher borrowing costs put pressure on rising valuations. Even Treasury Secretary Janet Yellen felt the sting with the record-low demand for a new round of national debt. It is speculated that a year of emergency incentives not only works, but some areas of the economy have a day of overheating. Markets, trapped in the same patterns for months by the Covid-19 crisis, now appear to have embarked on a long-awaited process of reassessment as trillions of dollars in federal spending and positive vaccination results increase the chances that developed countries will heal faster than Central bankers expected. “The economy is already recovering and a lot of people think this proposed incentive is much more than necessary,” said John Carey, portfolio manager at Amundi Asset Management US. “You burned too many coals and we’re building them.” Fire on a very intense level. People are starting to believe that the Fed will not be able to keep rates where they are. “After holding historically low levels since April, the surge in government bond yields – even if it suggests economic health – is inevitably a harrowing spectacle for traders, forcing them to rethink positions in multiple markets. Megacap tech names – formerly the darlings of the bull market – led the slump on Thursday. The Nasdaq 100 was down nearly 4% as the rise in interest rates made it harder to justify valuations higher than ever since the dot-com bubble. High bond yields even overwhelmed areas of stocks that tend to benefit from higher interest rates. The KBW Bank Index, which on Wednesday reached its highest level since 2007, fell 2.7% in the carnage. The energy and utility shares of the S&P 500 also fell by at least 1%. The currency markets were also shaken. The Bloomberg Dollar Index rose 0.7% on Thursday, its strongest since September, as historically volatile emerging market currencies fell. The South African rand, Turkish lira and Mexican peso led the decline in emerging markets, with a decline of at least 2%. The effects of locksteps in bonds and stocks can be seen in sophisticated portfolio strategies like risk parity, which seek to balance exposure to assets, according to Wells Fargo Investment Institute. The $ 1.2 billion publicly traded RPAR Risk Parity (ticker RPAR) fund fell as much as 2.7% – the biggest drop since March 18, 2020 at the height of the pandemic. “Right now these rates are skyrocketing, which can worry strategies like risk parity, and the volatility of fixed income is affecting other assets as well,” said Sameer Samana, senior global markets strategist, Wells Fargo Investment Institute. “Until the rate at which rates are rising slows down, we may need to mentally prepare for more days like this.” Breakeven inflation rates – projections for bond traders where annual consumer price inflation averages over the decade – is around peaks for several years. At around 2.2%, it is a significant increase over the previous year, when it fell to 0.47% in March. “We are in uncharted territory where we are likely to see a global economic boom with an unprecedented global surge in inflation. “Said Bryce Doty, Portfolio Manager at Sit Fixed Income Advisors. “Nobody knows how it will turn out.” While the US unemployment rate is still 6.3%, it is below the 6.5% forecast by policy makers last June. A number of economic data has kept Citigroup Inc.’s Economic Surprise Index in solid positive territory since last June, including retail and housing reports that have significantly outperformed forecasts. Currently, Fed Chairman Jerome Powell and his colleagues insist that their best course of action is to keep interest rates low to ensure the rebound takes hold. Powell told the Senate Banking Committee Tuesday that the recent surge in bond yields that has unsettled the stock market was “a declaration of confidence” in a robust economic outlook. On Thursday, as bond yields skyrocketed, Raphael Bostic, president of the US Federal Reserve in Atlanta, said, “The economy can run pretty hot without spikes in significant inflation.” While that is true, financial markets are relentlessly forward-looking – and see the risks associated with possible overheating. The most obvious manifestation of this is the bond sell-off for now. Investment firms such as the Research Arm of BlackRock Inc. and Aberdeen Standard Investments are pulling out of sovereign debt. “If the bond market wants to run, we will they run much faster than any central banker, and that’s to be seen again, “said Peter Boockvar, chief investment officer of the Bleakley Advisory Group.” Also, be careful about what you want. Don’t spend all of your waking hours artificially raising interest rates suppress and then aim for higher inflation because if the market believes the In flation will come, you will be run over. 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