Morning Report Friday 12 September 2014
** Please note the Hickman Report will come out Sunday night due to annual building maintenance at our offices in Sydney.
If we are approaching a “Bond Bubble” what is the likely outcome for equities?
Bonds have simply gone to crazy levels, as interest rates are negative for the first time in history in a number of European countries – you have to pay them to hold your money! The market is talking about when interest rates will rise in the US, not if, hence the only surprise will be in the timing. In 1994, we had a bond crash that led to a correction in equities of just under 10% after aggressive monetary stimulus inflated asset prices (see chart 1). In the short term, I am very bullish US interest rates, targeting at least 3.25% for the 10 year bonds (see chart 2); while this is not high, it is a 27% rise from current levels. Money flowing out of bonds may have a significant knee jerk reaction on the ASX200 that is dominated by the big 4 banks and Telstra, where people have parked enormous amounts of cash chasing yield.
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