Lesley Marks, chief investment officer at Mackenzie Investments, joins BNN Bloomberg for her view on the markets. Marks says the current market optimism amid hopes the Fed is done raising rates could be short-lived. She advises investors to look for companies with healthy balance sheets.

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Real Market Concerns Driving Yields Higher, Says Strategist

In recent months, the global bond market has witnessed a significant increase in yields. This development has raised questions about the underlying reasons for this surge, and a leading strategist suggests that real market concerns may be the driving force behind it.

Yields on government bonds serve as a benchmark for other interest rates and play a crucial role in financial markets. When yields rise, it indicates that investors are demanding higher returns on their investments due to perceived risks or inflationary pressures.

According to the strategist, the primary factor driving this surge in yields is the improvement in the global economic outlook. With vaccination campaigns being rolled out worldwide and economies gradually reopening, there are growing expectations of a strong economic recovery. This optimistic sentiment has encouraged investors to shift their focus from the safe-haven assets of bonds towards riskier investments like equities, thus pushing bond yields higher.

Furthermore, the potential for rising inflation is another critical factor contributing to the increase in yields. Governments and central banks around the world have implemented massive fiscal stimulus measures to mitigate the impact of the pandemic-induced economic downturn. However, this flood of liquidity and government spending has raised concerns about a potential surge in inflation.

Inflation erodes the value of fixed-income investments, such as bonds, as it reduces the purchasing power of future interest payments. To compensate for this risk, investors demand higher yields on bonds, driving up their prices. This dynamic is further fueled by market expectations of possible rate hikes by central banks to curb inflation, adding to the upward pressure on yields.

Moreover, real market concerns regarding the sustainability of massive government debt burdens also contribute to the rise in yields. The pandemic has forced governments to adopt unprecedented borrowing to support their economies, resulting in ballooning levels of debt. As investors become increasingly cautious about the ability of governments to service this mounting debt, they demand higher returns on their investments, further increasing bond yields.

Overall, the surge in bond yields is not solely driven by speculators betting against the market, but rather by genuine market concerns. The improving economic outlook, potential inflationary pressures, and the sustainability of government debt burdens are all playing pivotal roles. As economies gather momentum and investors reposition their portfolios, these real market concerns are likely to continue driving yields higher.

While higher yields can be perceived as a sign of a recovering economy, they also have implications for various sectors. For instance, rising borrowing costs can impact businesses and consumers seeking loans. Additionally, higher yields make bonds more attractive to investors relative to other assets, potentially leading to increased volatility in equity markets.

In conclusion, the surge in bond yields is more than just a speculative trend. Real market concerns, including an improving economic outlook, potential inflationary pressures, and the sustainability of government debt burdens, are the driving factors behind this development. As the global economy moves towards recovery, it’s essential to closely monitor these concerns and their impact on various market sectors.