{"id":69733,"date":"2018-03-08T01:15:00","date_gmt":"2018-03-08T00:15:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/not-the-start-of-a-bear-market\/"},"modified":"2020-01-01T22:15:10","modified_gmt":"2020-01-01T21:15:10","slug":"not-the-start-of-a-bear-market","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/not-the-start-of-a-bear-market\/","title":{"rendered":"Not the start of a bear market"},"content":{"rendered":"

Fixed Income market globally has been selling off since
\nbeginning of the year, with 10Y US Treasuries (USTs)
\nand 10Y Bunds yields higher by nearly 50bp and 30bp
\nrespectively. The move has been driven by a number of
\nfactors 1) expected shift in central bank policies
\n2) beginning of year portfolio flows and the return of
\nsupply 3) better economic data.<\/p>\n

Even though the sell-off appears aggressive, it is
\nrelatively modest versus previous episodes. 10Y USTs
\nmoved by nearly 80bp in the month following US
\npresidential elections in 2016 and by nearly 135bp
\naround the taper tantrum. Similarly 10Y Bunds had sold
\noff by nearly 90bp in April-15 which was driven by
\nposition squaring rather than macro factors. In all the
\nabove cases, the sell-off did not last long and
\neventually reversed.<\/p>\n

Despite the recent sell-off, valuations for both the US
\nand the European markets are not stretched. Our risk
\npremium metric (which compares bond yields versus
\nlong term expectations of growth and inflation) suggests
\nthat the fair value range for 10Y USTs is 2.05% to
\n2.80% and that for 10Y Bunds is 25bp to 75bp.<\/quote><\/p>\n

Currently we have moved to the upper end of the fair
\nvalue range both in the US and in Germany. While
\nvaluations may not be stretched, as rates move to the
\nupper end of the fair value range, the sensitivity of risky
\nassets to the level of rates should increase.<\/p>\n

\"sell-off_in_bunds_modest_vs_april-15.jpg\"<\/a><\/p>\n

To gauge the sensitivity of risky assets to a move in rates, we can
\nuse a risk premium framework. Conventional measures
\nof valuing equities would suggest that equities are
\nover-valued. However, when valued vs rates (equity
\nyield \u2013 real bond yield), equity risk premium does not
\nappear in a bubble territory, suggesting that risky
\nassets are supported only as long as rates continue to
\nremain low.<\/p>\n

We would argue that risky assets are more sensitive to
\na shift in central bank policies than rates. Using a
\nsimplistic framework for central bank policy impact, we
\ncompare the asset price evolution since the start of the
\neasy monetary policy.<\/p>\n

On a comparative basis, we find that rates have
\nbenefited the least from the easy monetary policies.
\nEquities, EM and HY have been the largest
\nbeneficiaries of the support from central banks.<\/quote><\/p>\n

As the supportive policies are withdrawn, one would expect
\nthat the asset price evolution to be in exactly the same
\norder i.e. Equities, EM and HY would be much more
\nvulnerable to a rate sell-off than the sovereign bond
\nmarket.<\/p>\n

Thus a rate sell-off from current levels becomes
\nself-defeating. If rates sell-off further, it would trigger a
\nsell-off in risky assets which would in-turn create a bid
\nfor fixed income.