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Shelter from the Storm: Where to Go Amid Rising Yields

A substantial rise in US Treasury yields could have further to run given heightened inflation expectations and how low yields were post the COVID-19 crisis. This outlook suggests fixed income investors should retain a defensive/short duration stance. Looking at previous Treasury market sell-offs suggests favouring convertibles and high yield bonds, and also a preference for emerging market hard currency bonds to local currency.


Yields Have Risen Rapidly

The sell-off in Treasuries has shocked fixed income investors, with yields on the 10-year more than 100bp higher than levels seen at the start of August 2020. There had been some hope that the substantial amount of securities purchases by central banks would at least slow the rise, but the move since the end of January 2021 has actually accelerated.

The backdrop for US Treasuries is certainly a challenging one. The US economy has not slowed at the start of 2021 but is instead showing strong growth. With the vaccination program proceeding more swiftly than expected, a resumption of something that resembles ‘business as usual’ should also be quicker than had been anticipated even a couple of months ago.

US inflation has also risen more sharply than expected, touching 1.7% in February 2021, and is likely to continue on its upward path into the middle part of the year on the back of base effects. The recently unveiled US government spending package of $1.9 trillion will only add fuel to this fire.

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