SINGAPORE (Jan 22): Even as equity markets across the world soar to new heights, the bond market has been sending a less exuberant signal. Yields on US 10-year Treasuries, a major benchmark rate used in financial markets, have risen to just above 2.5%, almost twice the yield when they reached a trough in the middle of 2016. Similarly, in Europe, the German “bund” yield is at its highest level in about two years. Shorter tenure yields have also risen — the two-year US Treasury bill is now yielding around 2%, its highest level since the financial crisis erupted in 2008.

Yet, the continuing boom in equity prices suggests that many financial investors are not spooked by higher interest rates. While some long-time observers such as bond market guru Bill Gross have warned about a new bear market in bonds, others have countered that, on the whole, any rise in bond yields and interest rates generally will have a modest impact on the economy and asset values.

Our view is that global interest rates are set to rise further and will probably reach a point where they will seriously hurt financial markets. Valuations in riskier asset classes including emerging Asian equities will be at clear risk as the year progresses.

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