Everyone has a breaking point, but every breaking point is not the same.
The latter view also rings true for the world's sovereign bond markets, many of which have been artificially inflated by central bank purchases and/or lax regulations. The ultimate outcome is that prices have been driven up and bond yields have been driven down.
What happens, though, when the symphonic music stops and the punk rock music begins?
The metaphoric answer is that the soothing harmony gets disrupted by some deafening and discordant tunes.
In other words, adverse market reactions occur as selling activity and bond yields both increase, creating residual concerns about feedback loops that have knock-on effects for the economy and other capital markets.
A Move Getting Noticed
There has been a little taste of this punk rock music in China of late where the yield on the benchmark 10-yr bond has hit 4.00%, up markedly from the nadir of 2.63% seen in October 2016.
That move has been precipitated by myriad factors stemming from concerns about a pickup in inflation, the potential for higher policy rates, and deleveraging policies aimed at curbing financial excesses and the specter of systemic risk.
The move to 4.00% has not gone unnoticed by Chinese equity investors. The first foray above that mark since 2014 occurred on November 13 which, incidentally, marked the apex of a 13% rally for the Shanghai Composite that began in May.
What It All Means
So, is a 4.00% yield for the 10-yr Chinese bond the breaking point for the Chinese stock market?
No one can say for sure, yet it has certainly stood as a "yield sign" for equity investors/traders that the easy-money trade won't be so easy any more now that the harmonious relationship between easy monetary policy, persistently low inflation, and lax regulation seems to be coming to an end.
In that respect, it's a trading dynamic worth watching, because the stock and bond markets in the U.S. could be dancing to a similar offbeat tune if the 10-yr note yield breaks out of its low-rate stupor.