Snapshots was reading about police forces using drone capture guns and prisons installing radio jamming SkyFences on the BBC news app this morning. The pace of technological change is breathtaking and makes our teenage science fiction dreams seem timid in hindsight. Technological change will continue and new breakthroughs will occur in clean-tech and food-tech. These will require large capital outlays for property, plant and equipment that could be aided by a new generation of ESG driven investors as we alluded to in our last Snapshots. The future is bright in this respect.
Yields
On a more immediate note, we note that US 10 year treasury yields have pushed convincingly through 3% and the world’s global bond markets have followed suit. A number of factors are at play in the US which is still by far the world’s largest government bond market. These include the end of QE, increased Treasury supply to finance Trump’s fiscal stimulus and rising inflation. We have talked about each of these over the course of the year. If the Democrats win the House at the mid-term elections on November 6th their first major policy proposal will be a large infrastructure package which could put further pressure on a stretched federal deficit.
We also note that rising yields have started to unsettle equity markets. We think this is through the discounting of future corporate cash flows at higher rates.
Widowmakers
Widowmakers is the nickname for wrong way bets that end careers on trading floors. Rising US government bond yields have caught some famous and experienced investors off guard. Bill Gross has tried to bet that the spread between US and German government bonds, which is at a 20year high, will narrow. It has continued to widen. We think the volatile yield environment will persist and continue to remain cautious.
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