Buy Treasuries For Short Term Bounce
Since Donald Trump was elected as president of the United States at the beginning of this month, global economic and political uncertainty has only increased both in and outside the US. The European Union is on the verge of disintegration, the UK is struggling after Brexit and China’s economic outlook is becoming more uncertain by the day. But despite growing uncertainty, sovereign debt markets have been weak since the election.
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- Massive Reallocation From Bonds Into Is Coming: Deutsche Bank
This is something analysts at Source, the multi-asset research platform explore in a research note sent out to clients at the beginning of this week.
Source: Buy Treasuries For Short Term Bounce
“The only country where benchmark bond yields dropped (in the universe we are looking at) is Greece. Although this signals a more “risk on” asset allocation environment in general, we see reasons behind these moves in a similar fashion to Tolstoy: “Happy families are all alike; every unhappy family is unhappy in its own way.”
The only country where yields have dropped since Trump’s election is Greece, which, considering the country’s recent history, is rather astounding. This anomaly Source speculates could be something to do with the growing political risk in the core of Europe:
“The periphery seems to be pricing in more political risk in Europe, which for the moment, seems to have a stronger effect than ECB purchases, although central bank buying will cap any significant rise in rates.”
Furthermore, the research outfit notes that Trump’s election is generally seen as a negative for global economic cooperation and growth. Less globalization coupled with higher rates makes the US a relatively more attractive destination for outside investors, and therefore strengthens the dollar.Less and more expensive investment is a headwind for EM assets, including sovereign debt, which may be a solution to rising yields outside the US.
Another possible solution, Source speculates, is the fact that markets have completely changed their views on a Trump presidency. More infrastructure spending, a less hawkish fiscal and a more hawkish monetary policy is the consensus now, arguing for higher rates. US Treasury yields have clocked in the biggest increase in absolute terms across the bond universe (barring Brazil) at almost 50 basis points since the election.
Could this be the end of the multi-decade bull market? Probably not. Source argues “demographic trends will likely limit inflation in the coming decades and therefore we think ‘normal’ levels of Fed rates will be around 2% rather than 3%” limiting yield growth and pulling down rates. What’s more, it’s unlikely Fed will actively reduce its assets by selling off its bond holdings.
Overall, despite the recent yield hike, Source believes US Treasuries look attractive at current levels.