Markets Whipsaw as Yields Surge

I’m suffering from whiplash after watching markets this week.

This is the wild ride we went on from Monday to Thursday in the S&P/ASX 200 [ASX:XJO]:

Down 125, up 100, down 108, up 125.

That’s a whole lot of confusion.

We have ended the week on a positive note, but that hasn’t shifted the short-term bearish outlook.

Bonds are, of course, the big story this week as yields continue to march higher around the world.

Japanese bonds are in a slow-motion train crash. Remember that as yields rise, the prices of underlying bonds fall.

Japanese bonds implode

Source: TradingView

[Click to open in a new window]

Now that Japan has abandoned yield curve control, the bonds are searching for the right price. They haven’t found it yet.

We must consider the rising risk that Japanese investors will repatriate funds to Japan as yields rise toward fair levels.

I am wondering how many dead men walking there are out there. The losses that must be sitting on the balance sheets of various companies in Japan must be enormous.

If you bought $1,000,000 worth of 30-year Japanese Government Bonds (JGBs) five years ago at a 0.5% yield and the current yield is now 4%, your capital loss is approximately $546,773, leaving your investment worth only $453,227.

You can either sell for a huge loss or hold on to them with a negligible yield and see your money eaten away by inflation.

The utter madness of what went on in Japan over the last decade — as they kept rates near zero and controlled their yield curve — had ramifications for the world’s markets.

The carry trade and capital flight saw mountains of money leaving Japan and flooding into markets around the world.

What happens when that formerly asset-inflating process reverses?

US bonds have also been selling off, but nowhere near as steeply as Japan.

Stocks will probably be able to handle US 10-year rates below 5%, but if we see them shooting above there, cracks may appear.

So keeping an eye on bond markets is necessary as we move forward.

Charlie and I discuss the situation in the video below.

The ramifications of rising yields are a spike in the US dollar, and that, in turn, is dampening precious and base metals.

But the underlying strength of the bull market in real things shouldn’t ultimately be derailed by currency moves.

Charlie and I check out the wild moves in the ASX 200 to show you how useful it is to understand where the buy and sell zones are, so you don’t make dumb mistakes while trading.

We also have a good old whinge about the unintended consequences emerging as we digest the ramifications of the major changes to tax policy announced in the budget.

The reality is that the new rules could be cataclysmic for investment in smaller, high-risk stocks. That’s due to the unfair tax treatment that arises when you consider a realistic portfolio of stocks with most treading water while only a few make most of the gains. A very common occurrence when trading smaller high-risk stocks.

Check out the Closing Bell video below for the discussion, and I even chuck in a stock to consider for those who make it to the end.

Don’t forget to sign up for Murray’s Trading Room if you want detailed analysis of the stocks you are interested in, and are keen to see the best opportunities others have found.

I whip through a whole bunch of charts live, in an hour or so, every Wednesday morning, and you can either join live or watch the replay at your leisure.

Closing Bell