The over-arching growth and reflation narrative that has taken hold of financial markets has seen a massive sell-off in bonds, but this time equity markets in industrialised countries haven't been caught up in the carnage, unlike 2013's "taper tantrum".
The sell-off in bonds, sparked by bets that Donald Trump's infrastructure spending plans will lift both economic growth and inflation, has wiped an approximate $US1 trillion off the value of global bond markets since last Thursday. The rout has now pushed the yield on the benchmark 10-year US bonds above 2 per cent for the first time since January, while the Australian 10-year yield on Tuesday morning pushed as high as 2.737 per cent, also its highest since January (bond prices move in the opposite direction to yields).
"In the world of the last five years, if bonds do well, equities do well," says Damien Boey, equity strategist at Credit Suisse.
"The observation recently is that if bonds do poorly then equities don't do anything, because you're pricing in the growth recovery. This will happen up until the point when the world normalises again."
Following the Brexit vote in June, government bond yields have rocketed higher, from 1.81 per cent in Australia to 2.64 per cent in just four months. The US has seen a jump to 2.2 per cent from 1.36 per cent and Germany has managed to push back into positive territory, rising from -0.19 per cent to 0.31 per cent in the same four-month period.
Meanwhile sharemarkets around the developed world have been on a tear. Last week, the Dow Jones chalked up its best week in five years, closing at a record high and the local Australian sharemarket enjoyed its biggest one-day jump in five years, following the election result.
"Analysts are not yet downgrading valuations for the bulk of stocks on rising interest rates, which is what has caused the bond sell-off," says James Gerrish, senior investment advisor at Shaw & Partners.
"So at the moment, we're just seeing the more obvious ones get hit, like Sydney Airport and Westfield."
Sharemarket investors are happily digesting the prospect of more fiscal stimulus, led by the United States, and are rotating steadily out of bond proxies and those companies exposed to rising global interest rates and into cyclical plays, such as resources.
"Donald Trump's election as president has added to expectations of a "great policy rotation" away from relying on central banks to boost growth to relying more on fiscal policy," says Shane Oliver, head of investment strategy and chief economist at AMP Capital.
"There are expectations that his policies will cut taxes, boost infrastructure spending and deregulate, boosting growth and inflation and allowing the Fed to raise rates faster."
So while bond yields have shot up, equity markets have enjoyed support as investors position themselves for this impending period of growth.
Some argue the current shift is all part of a global market "normalisation".
"Over the past 30 to 40 years all that mattered was the valuation of one asset class relative to another, it's always been a relative picture," says Damien Boey, equity strategist at Credit Suisse. "We have never questioned the absolute valuation of things because bonds are a risk-free instrument.
"But in the last five years we've become very interested in the valuation of bonds, so much so that the overvaluation of bonds has dominated the entire picture, and we haven't been concerned with relative valuations any more," Mr Boey says.
Spitting the dummy
But investors are wary of a repeat of the 2013 "taper tantrum", which refers to the surge in US Treasury yields after the Fed flagged it would soon start to slow down the rate of bond purchases and end its unprecedented period of quantitative easing.
Some argue the sharp drop in bond valuations may give some investors a headache.
"The real risk is that because the text books say bonds are 'safe', many buyers will have geared up multiple times, so that 15 per cent drop could potentially wipe out half your capital," warns Mark Tinker, director of AXA Investment Managers.
Trump's plans to significantly widen the budget deficit, slash taxes and ramp up infrastructure could potentially add 0.5 per cent per annum to GDP," suggests Mr Boey.
"In Australia we should be hitting a long-term nominal growth rate of 5 and quarter per cent, so that's where our bond yields should be going," he says. "But if you look at the yields now, even though they've spiked, they still have a long way to go to get up to that level. But having said that, who knows what growth should be, the world could be a very different place in five or 10 years."
Previous concerns that inflation and economic growth would remain weak pushed bond yields to historic lows mid year, sending many around the world to negative yield, meaning investors were paying for the privilege of lending money to governments.
