The U.S. bond market sell-off: Is there reason to worry?
On the latest edition of Market Week in Review, Consulting Director Sophie Antal Gilbert and Mark Eibel, director, client investment strategies, discussed the potential factors behind the recent sell-off in the U.S. bond market.
Benchmark Treasury yield reaches 10-month high
Yields on the U.S. 10-year Treasury note rose to the highest level in nearly 10 months on Jan. 9, Eibel said—with the likely trigger being China’s announcement that it may begin cutting purchases of U.S. debt. “Whether or not that’s true is up for debate,” Eibel remarked—“as are the motives behind the announcement. It could be related to China wanting to deal more with its own currency, or it could be related to trade tensions with the U.S.” He added that it’s also important for investors to take a step back and look at the global picture. With many major central banks either embarking on a policy of quantitative tightening (like in the U.S.) or mulling the end of quantitative easement (such as in the Eurozone and Japan), it makes sense that longer-term interest rates are slowly starting to rise, Eibel said.
Ultimately, in his viewpoint, this isn’t a worrisome trend. “At the end of the day, rates are likely moving up because we have a strong economy, both in the U.S. and on a global scale,” Eibel concluded—“and that’s good news.”
Fourth quarter earnings season: Strong growth forecast
Transitioning to fourth quarter earnings season, which is now underway, Eibel said that he and the team of Russell Investments strategists are adjusting their growth forecast upward, in part due to a soft U.S. dollar. “This helps multinational companies,” he explained—adding that because quarterly growth is calculated year-over-year, there’s also likely to be strong lift from the energy sector, which performed much better in the fourth quarter of 2017 than during the same timeframe in 2016. With this in mind, Eibel projects an earnings growth number near 10 or 11%.
“As good as we’re predicting this earnings season to be, we think the real takeaway here will be what the heads of these companies talk about in regards to 2018,” he stated. In other words, said Eibel, business leaders’ views on how U.S. tax reform may impact growth—or whether they’re expecting any upward surprises for the year—will be equally instrumental.
Cryptocurrency: Here to stay?
Bitcoin and other cryptocurrencies were back in the limelight the week of Jan. 8, Eibel said—with some companies announcing plans to launch their own versions, while governments such as South Korea floated potential bans. The takeaway for investors with all of this? “Honestly, I think you have to look at cryptocurrency as a speculative investment,” Eibel said—"but with that, it’s also important to separate out a digital currency like bitcoin from the underlying blockchain technology associated with it.” In his mind, it’s the potential applications of this technology that’s likely to have more of an impact on currency going forward.
As for the potential regulation of cryptocurrencies like bitcoin? “This might take a little wind out of the speculative sails for now,” he concluded.