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The exogenous factor

Long term yields globally are going up, and there are endogenous factors to justify the move such as deficits and a potential comeback from inflation. But there is also an exogenous factor, which is the #boj management of the local yield curve. After years of deflation, Japan finally has managed to import some inflation into its economy. The problem is they have too much debt and the long term yield has increased in yield 50%+ over the last few months. To control that, the Japanese government has been printing money to buy 10 year #jgb, causing the yen to weaken, and as a result, Japanese equities, are working as the adjusting mechanism, going up as they benefit from exports to stronger currencies. But as yields go up, they’re pushing US yields up as well, causing more stress on the budget deficit, with in turn make bonds less attractive, or more risky, which pushes yields up. This dynamic usually doesn’t end well, because at some point, the U.S. equity market, which uses the treasury curve to calculate valuations, starts feeling the gravity pull, which causes a correction. We may be at that point.


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