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How this bond rout is, and isn’t, like the rest

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Think this bond selloff is unusual? It isn't. Yet it is.

What isn't unusual is the speed and depth of the selloff. What is unusual is how other financial markets are responding.

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In a report set for release Friday, economists Douglas Porter and Robert Kavcic of BMO Nesbitt Burns write that during the 30-year secular bull market for bonds, there have been seven episodes where long-term U.S. bond yields have risen by more than 125 basis points in less than a year. For all the drama of the latest selloff, U.S. 10-year yields were still up just 122 basis points from their lows of last summer to their peak this week. (A basis point is one-hundredth of a percentage point.) Granted, 100 points of that came in just the past two months, but we're still not in weird territory here. Not a black swan in sight.

But the reaction of other asset classes to this sell-off has been, frankly, bizarre.

In every one of the previous seven sell-offs, commodity prices have surged. This time? The Reuters/Jefferies CRB commodity index is down 14 per cent since September.

In five of the seven sell-offs, equities rallied – by 9 per cent, on average. This time? The S&P 500 fell 6 per cent from mid-May to its low this week.

In five of the seven sell-offs, the U.S. dollar declined. This time? The greenback has rallied 5 per cent against a basket of major currencies since the start of February.

So what makes this not particularly special-looking bond sell-off so special?

It's certainly not the root cause. As Mr. Porter and Mr. Kavcic note, all of the bond slumps in the past 30 years came in anticipation of a tightening of monetary policy by the U.S. Federal Reserve Board. The likelihood of an unwinding of the Fed's quantitative-easing (QE) program – a de facto tightening of policy – was the clear tip-off this time.

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Of course, there is other noise outside the U.S. central bank and the U.S. bond market that can't be ignored. China's banking troubles have added an element of risk to global markets, not to mention a threat to commodity demand from that resource-hungry economy, that has thrown all asset classes a curveball.

But there's another big, and perhaps even more worrisome, difference: Bond downturns have usually come under stronger economic conditions than the ones we have today.

"Almost all prior bond routs have come during periods of robust GDP growth," the report says, noting that median U.S. growth in the prior seven selloffs was nearly 4 per cent. By contrast, U.S. first-quarter GDP was reported this week at an annualized rate of just 1.8 per cent, and the consensus forecast for the full year is just 1.9 per cent.

The authors also note that the previous selloffs came amid "generally healthy home prices." While the U.S. housing market is in recovery from some atrociously low levels, the Case-Shiller index for U.S. home prices is still 5 per cent below its 10-year average, and 25 per cent below its 2006 peak.

The danger is that both the U.S. housing market and (by extension) the U.S. economic recovery could be imperilled by the surge in borrowing rates triggered by the bond sell-off. Economically, the bond sell-off looks to be ahead of itself – and there lie the risks being reflected in other asset classes.

David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More


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