Another perfect storm?

The surprise Kiwi tightening coming on the wake of the ECB rate hike triggered a sell off in fixed income markets as investors embraced themselves for the potential of additional hikes reflecting the strength in the global expansion and a rising risk for inflation. Markets were palpably nervous with the changing environment, leading to a jump in the volatility index (similar in impact to the Chinese triggered global stock market sell off at the end of February) and a drop in stock markets. Rising bond yields and a resulting shift in their relative attractiveness was another factor behind the sell off in equities. In the U.S., signs of a pick up in economic activity and better than expected trade balance figures were additional contributing factors that helped push the 10 year benchmark yield above the 5% psychological barrier. One clear impact of the rise in yields is it's corrosive effect on the yen and the Swiss franc resulting from the growing attractiveness of the carry trade.