A confluence of bad circumstances may be coming together to topple bond markets. Bonds have held up pretty well despite all the turmoil since Trump’s election, but Treasury bears may now be set to thrive. Analysts say inflation is under-priced, as is an aggressive Fed and failing foreign demand for the bonds. All of this could send yields surging, as could political risks in Europe. JP Morgan says they have a “short-duration position in developed markets” because “Lower bond yields and stronger growth momentum” are offering a good entry point. Beyond just the Fed getting more aggressive on rates, they will also stop reinvesting proceeds into new bonds, shrinking their balance sheet and removing a big source of demand from markets.
FINSUM: There is a lot to be bearish about in developed market bonds, but if there is one thing fixed income investors should have learned since the Crisis, it is to never count out the ability of low rates to persist.