US

Markets can often be tricky for investors in May as bond issuers take advantage of a window of opportunity following the Q1 earnings season and ahead of the typical summer lull. This often results in heavy supply in late April and early May, hence the old trader adage of “sell in May and go away”.

Crucially while the Fed may wait to see the evidence, markets won’t, and we therefore expect a ‘second wave’ of Treasury selling to happen well before then.

In TwentyFour's quarterly update, Mark Holman discussed his outlook for the bellwether US Treasury curve, and explained how he thinks investors can still look to pick up yield while avoiding traditionally more rate-sensitive markets.

Mark Holman explains why the likes of Warren Buffett and Ray Dalio are warning investors away from fixed income, and points out where he thinks they’re wrong.

This recent stability in the rates curve suggests to us that for now the market is listening to the Fed’s rhetoric and as a result the UST market feels better balanced.

The bear steepening of the US Treasury curve has undoubtedly been the story of 2021 so far for fixed income investors, many of whom will have felt the adverse impact of the broad rates sell-off on their portfolios.

In a developed country such as the US, a scenario of rising inflation expectations is usually accompanied by a bear steepening across maturities of the underlying yield curve.

Our year-end forecast of 1.50% for the 10-year is already looking very out of date, and it would be a brave person right now to suggest that 2% won’t be touched any time this year as the recovery gets into full flow with the Fed holding its tongue.

In summary things are going quite well, and in this scenario a rise in government bond yields does not necessarily bring about a tightening of financial conditions.

A couple of weeks ago we wrote about Treasuries breaking new ground and the potential for them to go higher as higher inflation expectations gathered pace.

Our end of year view on the 10 year is 1.50, but we could get there a lot quicker - now is not the time to be brave on Treasuries.

We think it is indeed time to begin the search for recovery stories and deleveraging credits in sectors where the execution strategy is likely to succeed.