How the Market Dominoes Could Fall – Barron's

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The prospect of a bond selloff by central banks isn’t a pleasant one for investors.


The Fed, European Central Bank, Bank of Japan and People’s Bank of China have been wholesale buyers since the global economic crisis, and their support has suppressed interest rates and propped up stock markets.

Now, investors fear that banks may dial back their buying, The New York Times reports. Plunging bond prices caused by falling demand would drive up yields. And those fatter yields could suck capital out of the stock market, causing a dip. “The market is very vulnerable to any change in supply and demand,” John Briggs, a bond strategist at NatWest Markets, tells the Times.

A reminder of this vulnerability came Wednesday with a report that that China might slow or stop its U.S. Treasury purchases. Treasuries sold off on the news.

The bond market has been restive in recent weeks, with the 10-year Treasury yield jumping to 2.59% this week from 2.3 in late 2017. The trend led bond guru Bill Gross to declare that the 30-year bond bull market is over.

There’s another hazard: Because the tax cut blew a fresh hole in the deficit, the U.S. will have to borrow even more money. “The U.S. is about to issue a whole lot more debt in an environment where the demand for that debt is about to go down,” Daniel Drezner, a professor of international politics at Tufts University, tells the Times. “What that means is interest rates are about to go up.”