OK, We Can Worry Now

If you remember in my previous postings, one of the major indicators as to when to start worrying about the present bull run is when US bond yields go past 5%. US Treasuries dropped for a second straight day Friday on expectations that accelerating economic growth and inflation will encourage central banks around the world to raise interest rates, causing the 10-year Treasury yield to surge to the highest since July and triggering a global equity sell-off. The yield on the 4.5 percent security due May 2017 now trades at 5.18 percent. Last Thursday and Friday were the first time since August 2006 it had breached the key 5 percent threshold.

The ECB also just recently raised rates thus putting a whole round of higher rates expectations which should start to work its way into global equities. The prospects of further rate hikes in the UK, euro zone and Japan are good to lure many into a risk aversion mentality. Risk aversion mentality will hit riskier assets harder, including commodities and emerging markets.

Though the sell-off on Thursday and Friday levelled off, and in fact got back some of the losses: we have to remember that risk aversion mentality grows on you and would be a roadblock for some time. Risk aversion mentality is not something you can digests and factor in and disregard after just a couple of days. Rates ARE headed higher in the UK, euro zone and Japan - make no bones about it. The US will have to follow or see a major selldown in the dollar. Risk-reward ratio for equity investments have turned sour, if you ask me, time to lighten up.