Nothing has been more unsettling this year for investors than the bond market. The sleepy part of the market has roared back, causing quite a stir relative to their usually more volatile sibling: equities. The sheer jump in interest rates from government bonds to mortgages and loans is just starting to send shock waves through the financial system.

The sudden surge in interest rates did not just hit the US, but everyone around the world. Interest rates in Europe and Asia have seen a similar rise including sleepy Japan. Rising interest rates in the island country have been in direct conflict with their central bank, the Bank of Japan (BOJ) to keep rates low. As the BOJ tries to keep interest rates low, it has the unintended (but foreseeable) consequence on their currency, the Yen. In the past few weeks, the Yen has seen a dramatic drop in value.

Currencies have always risen and fallen but the sudden drop in the Yen has been alarming for a few reasons. The Yen is one of the world’s most traded currencies (after the US Dollar and Euro). The Yen has been one of the world’s major “funding” currencies. Its ultra-low interest rates have made it a popular venue for large investors to borrow money cheaply. The borrowed money can get recycled, or carried over into many areas like US Treasuries, real estate, or high-growth technology stocks. Now with the sudden volatility in the Yen markets, investors are bracing for problems to spread.

So far, those concerns are not reflected in corporate America. In the past few weeks, CEOs from across the US have been giving updates on their businesses. Surprisingly, by and large, they have been rather upbeat. Airlines have seen a huge reversal in their fortunes and are seeing strong travel demand for the remainder of the year. Higher ticket prices have not impacted the huge demand from travelers. The venerable Procter & Gamble (PG) also echoed that sentiment last week. Management was surprised when consumer demand stayed strong for their premium products, even after recent price hikes. Strong consumer demand for many services and goods continues to indicate that the economy is having bigger issues around supply, not with demand.

Consumer demand continues to underpin much of the strong economy we are experiencing. Worries about inflation and the war in Ukraine have weighed on consumer sentiment earlier this year. American consumers are starting to feel better about the sudden jump in inflation. Or at least learn to live with it a little better. In the near term, future demand rests on the shoulders of the Federal Reserve and if they can put their money where their mouth is.

/ben

Disclosures:
Advisory services offered by Apriem Advisors (“Apriem”), a registered investment adviser with the United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940. Any reference to or use of the terms “registered investment adviser” or “registered,” does not imply that Apriem Advisors or any person associated with Apriem Advisors has achieved a certain level of skill or training. Apriem Advisors may only transact business or render personalized investment advice in those states and international jurisdictions where we are registered, notice filed, or where we qualify for an exemption or exclusion from registration requirements. For complete information about our firm, please refer to our Form ADV Part 2A, 2B and CRS at any time.

All charts and data from Bloomberg unless otherwise indicated.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. Past performance is no guarantee of future results. The reader should not assume that investments in the securities identified were or will be profitable.

Copyright © 2022 Apriem Advisors, All rights reserved.