| Yaniv Pagot, Senior Vice President of the Tel Aviv Stock Exchange |
The year 2022 began on the left foot for investors in the U.S. bond market. U.S. government bond yields soared by 25 basis points, to a level of 1.75% within a few trading days.
This increase in yields took place against the background of clear signals from the Fed (Federal Reserve), according to which an accelerated reduction in the US will rise faster than forecast and will start rising as early as next March.
The Fed, which for a long time saw the high-inflation environment in the U.S. as something temporary, recently updated a version in its reference to the inflation environment so that U.S. government bond prices made the adjustments to the current Fed spirit.
Of the US is good at expressing the warming of the American economy while the rate of increase in the US, which stands at about 4.7% over the last 12 months is the best available predictor for future price pressures and this has also been internalized in the Fed.
The yields on US government bonds are a major indicator of the pricing of financial assets in the US and abroad, and indeed the aforementioned rise in yields has led to the opening of a red year in the US stock market.
Technology stocks in the US are the biggest victims of the change in the debt yield environment, given the sensitivity of growth companies’ valuations to the long-term interest rate. On the other hand, they In an environment of rising interest rates.
The Israeli bond market, which in the past was a strong and correlated response to a sharp rise in the US bond market, has shown strength in the face of a relatively sharp rise in US yields, with most domestic, government and corporate bond indices showing price stability. from the beginning of the year.
The strength of the domestic debt market is first and foremost a function of the monetary horizon in Israel, compared to the monetary horizon reflected in the United States.
Given the gaps in the inflation environment between the two economies, then the pressure on the Bank of Israel to start tightening monetary tightness is relatively small, and the local bond market understands this well.
Opening a positive interest rate gap between the dollar interest rate and the shekel interest rate will also serve the Bank of Israel in the foreign exchange arena, so that for the Bank of Israel it is convenient for the Fed to tighten and for its part wait with monetary tightening.
The Israeli stock market is also relatively resilient to the negative trend imported from the US, also due to the assessment of local investors that the Fed’s monetary challenge is expected to have a minor if any effect on the local interest rate environment in 2022.
The sectoral composition of an index in which there is a high presence of bank shares and real estate shares, supports the overperformance of the Israeli ratio index relative to its counterpart in the United States, given the interest rate route mentioned here.
Recall that the weight of the 7 largest technology stocks in the index and the index stands at about 52% and 27% respectively, and therefore any re-pricing of these stocks downward, shocks these indices, while the indices on the Tel Aviv Stock Exchange depend much less on the performance of securities Individual value and therefore also less vulnerable to realization in the technology sector.
Anyone who has been following the trading volumes on the Tel Aviv Stock Exchange for the past month and a half cannot miss the sharp rise in trading volumes. This increase is, among other things, an internalization of the benefits involved in investing in local indices, given the exceptional returns over the past year of the local stock market and the local monetary environment.
The impressive resilience of the Israeli capital market relative to its US counterpart does not indicate the immunity of local investment channels to the scenario of a sharp rise in US government debt yields and is a derivative of the monetary and fiscal conditions in Israel in the foreseeable future.
First, should the US government debt yields continue to soar sharply, then it is likely that a downward pricing of the domestic debt and bond market will take place, as investing in financial assets is first and foremost a derivative of an alternative in a risk-risk equation.
Moreover, should the inflation environment and / or inflation expectations in the Israeli economy continue to climb, ie, actual inflation will be higher than the inflation expectations inherent in the market and stand at about 2.7% for the various ranges, then the Central Bank of Israel may change And here lies a considerable risk.
At the same time, no one is as smart as someone with experience, and therefore it is important to mention that in the corresponding quarter last year, we saw a peak of about 80 basis points in the US government bond yields to 1.74%, which brought significant capital losses. Returned and descended relatively quickly and therefore it is proposed to be tolerant of such events and not to act recklessly based on an interpretation of a discrete economic figure.
The rise in yields last year shows that it is quite possible that the pressure on the global bond market because of the long-term debt of the US government, may continue in the short term and may even exacerbate. B.
At the same time, should there be and develop a sales panic, stemming from a sharp rise in yields in the US debt market, it is worth remembering that experience shows that the potential rise in yields at the present time is relatively limited.
Many in the world see US government debt at yields of about 2% as an extraordinary investment in the world of zero long-term interest rates in Europe and Japan and therefore these investors are expected to take advantage of the sharp declines in US government debt prices in order to increase position.
In addition, the corona is still circulating among us and is expected to have significant effects on real activity in the US and around the world.
Given a moderation in the global growth rate, then even the foot on the monetary brake pedal is likely to be relatively light, unless the entire world misses a dramatic and long-term change in the inflation environment.