Chart of the week: This week it's bond yields vs the PMIs. Specifically the composite manufacturing PMI across developed economies vs the US 10-Year government bond yield. Previously there has been a fairly good link between the two - and for good reason: bond yields typically trade to the direction that growth/inflation data set. Improving economic cycle metrics like this tend to lead a rise in inflation and tightening of monetary policy, which is bearish for bonds.
If you take the chart literally on the Markit PMI the US 10-year should be trading around 3.5% or if you use the ISM PMI it's more like 4%. Either way the conclusion is the same. One stumbling block has been the ongoing reinvestment of principal by the US Federal Reserve (which is progressively ceasing now), and of course the substantial quantitative easing programs by the ECB and BOJ, which in both respects is closer than ever to ending. So while this chart was in the category of "things that didn't work in 2017" I think it would be wrong to dismiss the risk of a surge in bond yields that this chart highlights so simply.
Thanks for reading - please feel free to share/forward this email.
Best regards,
Callum Thomas
Head of Research at Topdown Charts
