After a month long flirtation, the US 10 year decisively broke through the 3% yield barrier last week, prompting a sharp appreciation of the USD. Whilst US yields have now more than doubled from their 1.35% nadir in July 2016, this still represents an extremely low level by historical standards. Nonetheless, as we have discussed in recent weeks, the market is now clearly in a different and more volatile paradigm from that enjoyed during 2017.
The question is whether this is the end of the current expansion or just a later cycle environment. On balance, we remain in the latter camp and reiterate that the global cycle is not entirely synchronous; there are strong domestic stories for example in India, Egypt and much of Latin America. Moreover, China-US trade discussions appeared to end with a positive tone over the weekend. However, the longer-term issues of the developed world are starting to seep back to the front page, with Italy front and centre. Further, the impacts of higher rates for USD borrowers and a higher oil price more generally, will present something of a drag over coming quarters.
As regards the oil price, WTI ended little changed on the week but the Brent contracted traded above USD 80 for the first time since November 2014.
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