It’s safe to say global bonds are in an unprecedented regime with one-third of global sovereign debt in negative-yield territory and price-insensitive buyers (central banks) sucking up $180 billion in bonds every month. The supply-demand dynamics completely overwhelmed other fundamental aspects of bond investment and, with the BoE joining the easing party, there seems to be no end in sight at this point.

Despite the uncertainties surrounding all the possible paths Brexit might take, and the significant differences in the macro backdrop, we think our best guide is still the 1992 U.K. exit from the European Exchange Rate Mechanism (ERM). While the ERM exit was practically forced upon the U.K., Brexit is very much a self-inflicted wound. The initial market reaction was nonetheless similar with big drops in the pound in both cases. Overall, we think the market action of the pound is consistent with an event of this magnitude and there is probably more room on the downside.

Bonds are the Donald Trump of the investment world. Most people hate them but they keep going up. Throw anything at them, these “Teflon” bonds can shake it all off. QEs or Fed hikes, risk-on or risk-off, $100 oil or $30 oil, strong dollar or weak dollar, you name it. The multi-decade march toward ever-lower yields seems unstoppable, not even by the zero line these days, and there is little sign a change in the trend is imminent.

This rate hike might really be different as it occurs in an environment where, despite strong job growth, the business cycle has already turned contractionary, disinflation is still dominant, and various risky assets are showing late-stage characteristics. In other words, we are in unchartered territory. Expect the unexpected.

The dollar real effective exchange rate and the 10-year real yield are great proxies for monetary conditions. Stronger dollar and higher real yields are both indications of tighter monetary conditions. Unfortunately, this is what is happening right now. In other words, the markets are doing the tightening job for the Fed. This is why we think the Fed would be much better off postponing the rate hike.

Apart from a couple of market-oriented drivers that could reverse course on a short-term basis, we are not seeing convincing evidence of an imminent pick-up in inflation. Let us be clear. There is most definitely inflation in the financial markets, but that does not seem to benefit the average person in the U.S. The liquidity injected by various central banks went mostly into the financial markets first and foremost; only a small fraction of it trickled down to the average person. That is why all this money printing has not been reflected in various inflation measures.

The U.S. 10-year yield was pretty much trapped within a 25 bps range between 250 and 275 in July (Chart 1), but intra-day volatility has picked up noticeably. In the last three months, there were 21 days of greater than 5 bps daily moves and 7 days of greater than 10 bps daily moves on the U.S. 10-year yield, the most in the last one and a half years.

So now the question is how high can it go? Just like every other market, bond yields tend to overshoot, and we think 3% is the upper bound in the short-term. However, we believe it will settle back closer to 250 bps by the end of the year.

Japan's new Prime Minster Shinzo Abe made more of an impact on the market than anyone else last month. In what the market has dubbed "Abenomics," Abe not only launched a new fiscal stimulus, but also pushed the Bank of Japan to raise its inflation target from 1% to 2% AND agree to a new open-ended QE program. The reluctance on the BoJ's part is clearly visible because the new open-ended QE will not start until 2014 and there is no commitment to asset purchases after 2014. Shortly afterwards, the BoJ governor said he would step down, a clear sign of disagreement.

We've mentioned before the rapidly waning effect of the Fed policies. October was a good proof of that, with the S&P 500 index down about 2% (top chart). The stock market is no doubt part of the wealth effect the Fed was trying to create, but home prices, which represent the bulk of the average person's net worth, and personal income should also be considered a big part of the wealth effect.