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The many reasons why there won’t be a surge in US bond yields

The dreaded surge in US bond yields hasn’t happened and won’t. That makes Asia Unhedged optimistic about equities. There are a lot of reasons why, but the biggest single reason is that the dollar has stabilized against the Chinese RMB and other Asian currencies.

The chart shows a lockstep relationship between the declining dollar and rising “real” yields (the yield on Treasury Inflation-Protected Securities) since October. In fact, Asia Unhedged’s data slicer-and-dicer shows that the dollar’s weakness in Asia overwhelmed all other factors during the fourth quarter and the month of January. China has decided that the RMB appreciated far enough and won’t let it move further, so that’s no longer an issue.

There are, of course, a set of other reasons to be complacent about US bond yields.

The first is that inflation really isn’t in the pipeline. As we showed yesterday, the year-on-year growth of wages according to the Atlanta Federal Reserve’s measure of household data has actually been declining during the past six months. The second is that the Federal Reserve will take its time to evaluate further increases in the overnight interest rate after the bond market got ahead of itself during the past several weeks and the stock market momentarily went into freefall. The third is that the impetus for higher rates out of Europe is on hold, for political reasons: the negotiations for a German grand coalition have left the Social Democrats in charge of the Finance Ministry, and the Social Dems will support continued quantitative easing by the European Central Bank. A fourth is that the inflationary impetus from the oil price has peaked for the time being; higher oil prices fed directly into the inflation component of bond yields, but a surge in US shale production appears to have forestalled further increases for the time being.

Bottom line: buy equities, including the equity sectors that suffered most from the rate rise, for example real estate investment trusts. Remember that this is a value market, and concentrate on bargains with solid profitability. Our favorite remains Chinese H-shares, which got a drubbing in the general run of market volatility and stand to recover sharply.

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