In today’s tweet-driven financial markets, investors are fast having to learn how to invest in a world of binary outcomes. One day US-China trade negotiations are on track, the next a trade war between them is imminent. One day the US Federal Reserve is expected to go slow on reducing interest rates, the next some three interest rate cuts are expected to occur before the end of the year.
South Africa was caught up in the sharp global selloff in all assets deemed risky. Investors retreated into safe-haven assets en masse and, as a result, foreigners withdrew a net R7.5-billion from the domestic bond market during the week and 10-year government bond yields jumped to 8.4%. Given their recent declines, investors are contemplating whether global bonds are the next asset bubble waiting to burst. Sentiment is divided between those who are avoiding developed market bonds because of their rich market valuations and those who believe that accommodative US central bank monetary policy could see US Treasury yields slide to zero and perhaps into negative territory. In the event of the latter, even at sub-2%, benchmark US bonds could still deliver attractive returns.
Other developments that would result in this worst-case scenario unfolding would be a continued escalation in trade tensions and possible full-blown trade war. This would undoubtedly tip the world economy into recession and, given what are becoming entrenched low inflation expectations, could result in protracted Japanese-style stagflation – but at a global scale.
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