The US bond market is experiencing its worst sell-off in a decade. But what is much more impressive is what is happening in the British bond market, which has lost a staggering 27% this year. It's all the fault of the actions of the world's central banks, which are trying to suppress the strongest inflationary pressure in recent decades.
As I have repeatedly noted, the pressure on the pound and the bond market increased after the new government of British Prime Minister Liz Truss unveiled plans for large-scale tax cuts. All this in the face of an economic downturn and during an interest rate hike by the Bank of England, which already does not know what to do with an inflation rate above 10.0%. This has led to a sharp fall in the pound and a flight from UK government bonds, as investors fear another sharp increase in the already significant state budget deficit.
But not only the UK is suffering from what is happening worldwide. The Bloomberg Global Aggregate Total Return Index of total government and corporate bond yields has also declined by more than 20% compared to its peak value. It shows negative dynamics for the eighth consecutive session - the longest period of decline since 2016.
As for the eurozone, the question is also when the European Central Bank will begin to cut almost 5 trillion euros in bonds bought during the recent crisis. It is expected that this will be discussed at an extra-political meeting of officials in Cyprus, which will be held on October 5. If such a decision is made, it will put more pressure on the bond market. It is obvious that European companies wishing to refinance their bonds are now facing the highest costs in the entire history of observations - the central bank's actions have not passed by.
In the US, the yield on 10-year Treasury bonds has now reached the level last seen in 2010. Boston Fed President Susan Collins and her Cleveland colleague Loretta Mester said additional tightening is needed to curb persistently high inflation, which will most likely continue to push the bond market down and yield.
The 3.8% yield does not outweigh the current inflation the US faces. Still, it is a fairly acceptable level, which will not be the maximum – especially considering what lies ahead.
As for the stock market, the bearish mood is visible in all directions. For sure, in the near future, we will observe another wave of decline, although Goldman expects that the target level of the S&P 500 index at the end of the year will be around $ 3,600, which by the way, we are now. As for the technical picture of the S&P500, after yesterday's regular sell-off, traders managed to protect a minimum of $3,643. Today's trading started above $3,677, leaving hope for an upward correction. To build it in an attempt to find the bottom, the bulls need to return to the level of $3,704. Only after that, will it be possible to count on a breakthrough in the area of $3,744. The breakdown of this range will support a new upward momentum, already aimed at the resistance of $ 3,773. The furthest target will be in the area of $3,801. In the case of a downward movement, a breakdown of $3,677 will quickly push the trading instrument to $3,643 and $3,608 and open up an opportunity to update the support of $3,579. Below this range, you can bet on a larger sell-off of the index to a minimum of 3,544, where the pressure may ease a little.