Rising US Treasury Yields Shake Markets: What's Next for Investors?
The surge in US treasury yields this year has initially impacted the yen, won, euro, and British pound, as usual. However, now it appears that the impact of rising US interest rates is extending to highly valued technology stocks. Recent trading sessions have witnessed a significant shift in equity markets, with the Nasdaq experiencing a decline of over 2% while the Russell 2000 gained 1%. This reversal is unexpected compared to previous quarters.
With the increase in US treasury yields affecting currency markets and now influencing US growth stocks, investors are left questioning what will be affected next. Will rising yields disrupt the ongoing gold bull market, the emerging market boom, or the nascent bull market in industrial metals and energy? Additionally, concerns arise about the broader impact on economic growth.
The prevailing belief that rising yields will eventually correct themselves reflects a fundamentally deflationary mindset, which has been dominant for the past four decades. However, recent events challenge this assumption. Despite governments' historical ability to tax their populations to meet debt obligations, the increasing mobility of capital and individuals raises doubts about the sustainability of this approach. Countries like Canada, by significantly raising capital gains taxes, may face reduced tax revenues instead of the expected increase.
Similar challenges are seen in France, where despite increasing tax receipts over the last 50 years, the government has consistently run budget deficits, leading to a substantial rise in debt. Moreover, the recent decline in US commercial real estate prices, particularly in high-tax states like California and New York, suggests that high taxes could drive businesses and individuals to relocate to lower-tax areas.
In this context, the reliability of government bonds as a risk-free asset comes into question. The potential scenarios include a continuation of growing government spending outpacing tax receipts, leading to increased debt monetization by central banks. Alternatively, increased taxes could bring deficits under control, restoring confidence in government bonds. Finally, governments could sell assets to reduce debt, but this poses risks of asset price declines.
Considering these scenarios, the likelihood of each outcome remains uncertain. However, recent trends suggest a reevaluation of the traditional perceptions of risk-free assets and government fiscal policies is necessary.