Is the bond market predicting a bleak future for the global economy? | The Business | ABC NEWS
From London to New York and Tokyo, the bond market is flashing red as the price of oil spikes higher.
Traders fear the ongoing oil supply squeeze will push up inflation and interest rates, and slow economic growth.
Fixed-income specialist at Macquarie University, Tano Pelosi says the global economy is facing its third supply shock in as many years. He says there is a possible scenario where inflation spikes in the near term, but ultimately it becomes quite constricting on the economy.
“So financial conditions tighten and therefore you end up in a classic stagflation scenario,” he says.
However, he says bond markets aren’t pricing that in yet.
He says Japan is front and centre in his mind at the moment, because its fiscal position is unsustainable and putting a lot of pressure on the Yen.
“It’s a question of how many reserves they can keep on selling. Each time they hit the currency markets, US Treasury yields back up, so this becomes a bit of a doom loop.”
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