Michael Pascoe

The US
treasuries market might sound like a rather boring animal, but it’s doing
things that might just rattle the world’s stock markets. Certainly it gave Wall Street
pause for thought last night as bond yields jumped to their highest levels in a
couple of years.

Basically, Wall Street is increasingly
convinced that interest rates are on the rise and at some point, the risk-free yield
on a government bond begins to look a lot more attractive than what you might
or might not make on a toppy stock market.

The benchmark ten-year bond (the sort of
baseline for international capitalism) finished this morning at 4.74%
with plenty of Wall Street types confident it’s on its way to 5% before
much longer and maybe 5.25% by mid-year. That is in the context of
interest rates in Europe and Japan
also being on the move, albeit from very low levels.

The catch here is that the US economy is
continuing to ride a housing boom, just like Australia
did until a bit more than a year ago. And just like our little bubble, the US
version can’t last.

While the China story continues
to fuel our resources sector, the other leg of the world economy remains the US
consumer. Rattle the US stock market and have higher interest rates prick the housing
bubble and the Consumer of Last Resort will, like his and her Australian
cousins, start saving more and spend less.

It’s only a rattle at this stage. Some
optimists think everything will remain absolutely rosy – but it’s one more
thing to think about when placing your investment bets. And it’s one the
professionals will be watching particularly closely after our record run.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey