Peter Toogood, chief investment officer of investment advisory firm Embark Group, said that as central banks intensify their efforts to shrink their balance sheets, government bond yields will rise next year for “the wrong reasons”, which in turn will affect the stock market and rotate funds towards value stocks.
Over the past year, the policies of major central banks have shifted from quantitative easing (QE), which means buying bonds and driving down yields to lower borrowing costs and stimulate the economy, to quantitative tightening (QT), which is selling assets and pushing up yields. Stabilize inflation.
In recent months, much of the movement in the stock and bond markets has been related to investors’ expectations of a “policy shift” by central banks such as the Federal Reserve (Fed), that is, a pause in aggressive monetary tightening and interest rate hikes. Inflation in the economy may have peaked, and markets have briefly rebounded over the past few weeks.
Toogood said on CNBC’s Squawk Box Europe: “The inflation numbers are great, my biggest concern for next year remains the same, I still think bond yields are going to go up for the wrong reasons, September was a good warning sign, It illustrates what will happen if the government continues to spend.”
U.S. Treasury yields surged in September, with the 10-year yield briefly topping 4 percent, as investors tried to predict the Fed’s next move. Meanwhile, UK government bond yields have risen sharply, forcing the Bank of England to intervene to ensure financial stability and prevent the collapse of UK pension funds.
Toogood said that the policy shift from QE to QT will continue to push up bond yields next year on the grounds that the central bank will no longer buy government-issued bonds. “(pivot) is as important.
He also said rising borrowing costs would hurt unprofitable growth stocks, allowing money to rotate toward value stocks.
Some strategists predict that improving liquidity in financial markets should favor bonds next year as financial conditions reach tightening status, but Toogood believes there should be little room for bond prices to rise now that most market makers have returned to the market.
