LIVE MARKETS-Bond vigilantes no longer in the shadows

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BOND VIGILANTES NO LONGER IN THE SHADOWS

Bob Doll, CEO and CIO at Crossmark Global Investments, believes that the key pressures on asset markets are shifting back to those that existed prior to the tariff war.

That is, the risk of recession is receding, which will reinforce inflation's stickiness.

With this, he says there is a growing threat of higher bond yields coupled with pressure on equity valuations.

As Doll sees it, although the budget bill is still a work in progress, any bill will increase the federal budget deficit and debt over the foreseeable future, adding to Treasury Market risks.

Therefore, Doll's view is that premium U.S. equity and dollar valuations associated with U.S. exceptionalism have further to unwind.

"The percentage of the budget taken up by interest payments is rising rapidly, aided by higher interest rates. The rise in interest rates will eventually put pressure on high equity valuation levels. Most other DM countries are also in a similar, albeit less extreme, position in terms of government finances," writes Doll in his latest "Deliberations."

Doll notes that the spreads between the 30-year Treasury yield US30YT=RR and 10- US10YT=RR and 2- year US2YT=RR yields have recently widened.

To him, the reasons for this bear steepening of the curve include: deteriorating government finances, U.S. dollar weakness, and concerns over the long-term inflation outlook.

Doll's bottom line is that "Equity de-rating will intensify if bond yields move higher."

(Terence Gabriel)

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