Bond Investors are telling us that they are no longer worried about Deflation as they continue to demand an increased premium in yields to defend against future inflation.
German 10 year yields, after hitting close to 0% in April, have moved back to 1% (the highest level since Sept. 2014):
These are significant moves.
Globally, central banks have been aggressively using stimulative monetary policies to fight the potential for deflation and this has begun to work and global bond market participants are building this in to their outlooks.
Bond Markets Lead All Other Markets, so we need to pay attention.
Higher long term interest rates will have a dampening effect on the global economy, which has been struggling to achieve higher levels of growth:
Q1 2015 saw a marked (worse than expected) slowdown in GDP growth (especially i n North America and the Euro Area:
Expectations are for a stronger 2nd half of 2015 for the global economy, lead by the US.
To date, Q2 2015 data has shown mixed results:
Employment is growing, but the consumer and business sectors are not convinced and continue to hold back.
Bond Market Volatility, which at the moment is at record highs, will likely not encourage the consumer as mortgage rates rise and other costs of borrowing start to move higher.
Next week (beginning Tuesday, with an announcement on Wednesday at 2pm) Th US Federal Reserve's Federal Open Market Committee (FOMC) will meet to discuss the next steps for monetary policy.
It is widely expected by financial market participants, that they will not begin to raise interest rates until September.
Bond Market volatility will certainly be a topic of discussion at the meeting.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist