Emerging-market currencies had their worst selloff in five years yesterday. The U.S. 10-year yield fell three basis points, or 0.03 percentage point, to 2.75% as we seem to be experiencing a “global flight to quality.”
U.S. stocks slumped, sending the Dow Jones Industrial Average toward its biggest drop since September, and Treasuries rose after a gauge of China’s manufacturing shrank. Emerging-markets stocks fell while gold and natural gas rallied.
Ben Bernanke recently said the Fed is not overly concerned at the moment that there are bubbles forming in the financial system, although he stressed the Fed is “watching vigilantly” for such risks. Based on the Fed’s track record, there would be no bubbles if they had that foresight.
The bonds are interesting, because on one hand you could say they should sell off this year because of the tapering, but on the other hand one could say they might rally because a tapering program might inflict harm on the economy.