Is the bond yield conundrum fading?
• Long bonds have sold off globally over the past couple of weeks. This has reignited the discussion about the bond yield conundrum – or rather whether the bond yield conundrum is disappearing and yields are “normalising”. • However, so far the sell-off can be fully explained by a macro reappraisal, as investors have realised that the US economy looks a lot better than was consensus just a short while ago. Usually the simplest explanation should be preferred. This being the case, we are reluctant to call for an end to the bond yield conundrum in the short run. Even so, we revisit our bond yield forecasting models from past Awash With Cash papers and take a look at the Asian flow situation, in order to see if this is indeed the big thing. • Taking the latter first, a shift in Asian monetary and FX policies towards greater currency flexibility will reduce the recycling of FX reserves into Western capital markets and, indirectly, contribute to higher bond yields. However, we find no concl
