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KNOW YOUR BREAKEVEN

A lack of liquidity continues to plague the bond market, as indicated by elevated dealer holdings of long-term bonds and light trading volume. Volatility may remain elevated in the short term. Knowing your breakeven can help bond investors assess how resistant their current portfolio is to rising interest rates, and identify areas that offer value.

TAPER TANTRUM REDUX

Unlike the taper tantrum, which was driven by fears over the end of Fed stimulus, the current pullback is being driven by a position imbalance in our view. Lower-rated bond sectors have fared best during the pullback. A lower allocation to bonds overall may still be warranted, given the lack of opportunity and reduced protection offered by still historically low yields and high valuations.

MADE IN EUROPE

Europe bond weakness spilled over to the U.S. as investors look past week domestic data and forward to a better second half of 2015. Fading U.S. dollar strength, better growth in Europe, and the rebound in oil prices point to a reversal of the lower inflation expectations that powered bond strength for most of 2014 and early 2015.

CROSS CURRENTS

Intermediate to long-term Treasury yields increased by 0.01% to 0.11% for the week ending April 24, 2015, despite weaker economic data. Fed rate hike expectations reached their most marketfriendly point. Rate hike expectations remain notably below the Fed’s recently reduced rate forecasts by a roughly 50% margin over the next three years.

FOREIGN FACTORS

Foreign buying of U.S. bonds has slowed over recent years but remains a firm source of demand in the domestic bond market. Foreign purchases are likely to continue to take a backseat to economic growth and Federal Reserve interest rate expectations as a driver of bond prices and yields.

 
Results: 22 Articles found.
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