Why the bond market is predicting trouble for the US

Investors seem to be throwing caution to the winds, with stock markets hitting fresh highs on a daily basis. But the bond market is flagging up trouble ahead, says Jeremy Batstone at Charles Stanley. And with good reason - the US property market is showing signs of slowing, and no one is sure how much longer the Fed's interest rate hikes can go on. One thing seems sure - equity markets are likely to get a lot choppier in 2006...

Prevailing market action gives the indication that investors are throwing caution to the four winds. Equities are hitting new 4 year highs and medium dated bond yields are down to levels where investors feel that there's nothing to be gained by committing funds to that market.

At the short end of the yield curve, bonds have reacted to tighter monetary policy in the United States, the likelihood of a couple of further rate increases in Europe and the distinct possibility that the Bank of Japan might be stirred from its prolonged slumber by increasingly clear evidence that the country's economy is, at long last, re-emerging into the sunlight!

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