BondWorld : Since March last year, economic recovery, government spending and rising inflation have pushed up yields on government bonds.
Andrea De Gaetano – Independent Analyst
In the case of US Treasuries, the rise in yields was accompanied by a fall in the dollar.
From yield lows of 0.38% in March 2020, ten-year US T-Notes touched 1.78% at the end of March this year and now yield 1.58%. The Euro/US Dollar exchange rate climbed from 1.06 to 1.2350 in January and now stands at just under 1.22.
In the wake of the growing euphoria in equities, investors abandoned the lifeboats of safe havens such as Treasuries and the dollar and eagerly chased high-yield bonds, which soared in price and fell in yield. The Bank of America US High Yield Option Adjusted Spread, which measures the yield differential between high-yield bonds and a basket of US Treasuries, returned to 3.3%, levels not seen since 2006.
US inflation is at 2.6% and 1.6% excluding the more volatile components of food and energy and, as investors such as Warren Buffet argue, it could rise further. Even Janet Yellen, former central banker and now head of the US Treasury, has said that rates should rise to prevent the economy from overheating.
On the other hand, markets discount everything in advance and the first burst of inflation should already be in prices, especially in US long-dated bonds.
On Friday 7 May, the monthly US employment figures, which were well below expectations, will give the Fed an assist, as it will have one more good reason to hold off on raising rates.
US Treasuries and the US dollar, at their lowest levels for a year, offer the opportunity for tactical allocation ahead of the summer months, traditionally less favourable for equities.