Bond market misery has been a feature of recent months with all four markets continuing to decline. The macro-economic background has not helped as inflation concerns seem to be popping up everywhere and Covid-19 case numbers are on the rise once more.
On the inflation front, some of the early indicators that jumped as lockdowns started to end – such as lumber and iron ore – have fallen back, but there are others that have risen more recently that show no signs of rolling over.
Meanwhile, concerns are mounting that higher costs along with all the supply-chain issues and the China slowdown are having an effect on forward-looking indicators of economic activity.
Nonetheless, many central banks have been talking more hawkishly about raising rates and the front end (i.e. instruments dated with two years’ duration or less) of bond markets have started to adjust to the idea.
For example, since the summer UK two-year yields have jumped 60bps and US yields have risen 26bps over the last three months. Ultimately the direction is clear: cash rates are on the way up.
With economic indicators slipping and central banks talking about raising rates, we believe this backdrop leads to one where yield curves flatten. Our view is that the time is right for investors to consider where we are in the bond-yield cycle and which markets might benefit as a result.
Paul Brain, head of fixed income, Newton Investment Management.
Doc ID: 769900
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