Originally published by AxiTrader
US 10 year bonds closed at 1.74% at the end of New York Trade Thursday. That's 20 points above the low of last week and back at the pre-OFOMC meeting levels when traders fretted the Fed was about to increase interest rates in the US.
It's possible we are witnessing an important trend change for bonds which coupled with changed political and central bank thinking could mean that this year's Brexit lows may mark the low point in the 35-year secular bull market for bonds.
But I've been asked many times why that matters for forex, stock and commodity traders.
But rather than me explain I thought I share the thoughts of Ray Dalio - the founder of the world's biggest, consistent, and best performing hedge fund Bridgewater has to say on the topic.
Speaking at the 40th annual central banking seminar at the New York Fed this week, Dalio said that any uptick in bond rates is important because (emphasis added):
If interest rates rise just a little bit more than is discounted in the curve it will have a big negative effect on bonds and all asset prices, as they are all very sensitive to the discount rate used to calculate the present value of their future cash flows. That is because with interest rates having declined, the effective durations of all assets have lengthened, so they are more price-sensitive. For example, it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.
The 20 we've seen in US Treasuries is not Dalio’s 100 points. And last night's close at 1.74% is just back to the September high. But crucially it is the highest close since February 6 2016.
But as the risks rise of a break toward 2%, so too do the risks to other assets.
That's why bonds matter.
Have a great day's trading