US interest rates under breaking, what to do now with bonds

Numerous macroeconomic data were released in the US last week, which surprised the market positively. In particular, strong leap Retail, The decline in claims for unemployment benefits and the progressive rise in consumer prices should have given new impetus to the positive movement on interest rates that began in August 2020.

Conversely, income Treasury On the other hand, they fell by about 8 basis points. Explicitly indescribable movement: The success of the vaccination program and the consequent reopening of the economy Market sentiment is improving significantly. However, some factors may help us. The first feature is purely technical, with a strong acceleration of the upward trend from mid-February, which pierced the upper part of the channel, reaching an over-acquired level such as pulling back from the excess.

It is associated with partial or total closure of rough conditions, which monetizes profits over time. Also, the Japanese fiscal year ends at the end of March, with the following month, Japanese investors rebuilding their financial positions and creating a buying flow in the treasury. The large interest rate difference between US and Japanese government securities was an interesting opportunity at this point, even in the net of exchange risk hedging.

Employment and consumption should continue to benefit gradually Return to normal, But the market may focus more on inflation data. U.S. consumer prices will remain around 3.6% and just over 4% over the next two months, only due to the release of very negative data in April and May last year (-0.7% and -0, 1%). In some respects, the market should dismiss the “basic effect” already described, but it is true that the issuance of similar numbers last touched during the financial crisis of 2008 could create an emotional reaction to interest rates.

As discussed, this aspect is primarily about the United States, but even the eurozone may not object to it in the future. The European bond yield curve has another reason for attention, with negative yields and a much flatter shape than the US.
This means in many cases iLeading investors to accept higher risk (Longer period), in order to obtain a less negative or slightly positive yield at maturity.
However, if the ECB has an “approach” similar to that shown by the central bank over the past few months, any vertical curve in the United States could have a significant impact on portfolio performance.

Facing this asymmetry (low yield, high curvature risk), so it is better to consider a Cautionary approach, Restricts exposure to the longest part of the curve.