Where we stand right now may look similar as where we were in 2007 but actually could be different

The 10 year US government bond yields jumped up to 1.72 per cent and the markets also gain after the new data showed that the US services sector expanded. However, IMF warns world debt hits 152 trillion dollars. Once we receive good news and bad news at the same time, it is worth analyzing which one has a greater impact.

The good news is only relevant to the US economy, which means the US services sector expanded does not mean the services sectors in other economies also expanded. Therefore, in terms of the global economy, the impact of the bad news overrides the impact of the good news. Though the 10 year UK gilt yield responded to the increase in the 10 year US bond yield by increasing by 4.62 base points, considering the sharp depreciation of the GBP and the relatively small increase rate, there is no positive impact on the UK economy, especially given the UK markets fell today. When we come to the question how well the US is performing right now, we could have very divisive views. The US has a low unemployment rate, though the number of new jobs created is declining, a relatively high GDP growth, compared with other developed countries. The majorities of the US industries expanded. However, there is some bad news. As the IMF warns, global debt hits historical high, the US economy could face a much riskier global economic environment, which increases the risk facing the US businesses and individuals. In addition, the US itself has a very high debt level and in the past several years, some firms have taken advantage of the low interest rates and lifted up their leverage ratios. This definitely raises some worries.

The situation right now is a bit like what happened approximately ten years ago. Ten years ago, everyone said the housing market was great and mortgage-backed securities were safe and the US Fed was about to increase its rates. Right now, everyone says the government bonds and big corporate low yield bonds are safe and the US Fed seems to increase the rates as well. However, there is a difference between the bond market and the housing market. Bonds are issued by governments and firms. The prices in the housing market are determined by the supply and demand in the market, there is no additional value after the houses are built. However, governments and companies always make their contributions to their citizens and their shareholders, as well as to the whole society. As long as the values are created and acknowledged, people will expect more from them. This makes the bond markets decisively different from the housing markets.

Therefore, I may be very optimistic about the performance of the US economy in the future when the Fed decides to increase its base rate.