Results for search of category: Government Bonds

Dropping Bunds as the Benchmark

It’s time to restructure our euro-denominated fixed income portfolio. The yield on 7-10 year German bunds is too negative for comfort and they no longer offer the best way of creating risk-efficient portfolios. A pan-euro index of government bonds with the same maturity has done this more effectively for the last two years and we believe it offers a safer and more liquid benchmark asset.  [Read More... ]

How to Hedge an Equity Sell-Off

Bonds don’t always go up when equities go down. In 2003, holding long-dated government bonds on average offset 50% of local currency losses in developed equity markets. That ratio has fallen steadily in each of the following major sell-offs, 2009, 2016 and 2020. This year, it was effectively zero on average for the seven largest developed markets. For some countries, it was negative - i.e. bonds went down just when you needed them most.   [Read More... ]

Lessons from a Fast Market

Yesterday’s sell-off was so brutal that it probably marks the start of a different regime in equity markets. We are out of Phase 1 of the recovery and into a second more sceptical and nervous regime. Both the US and the UK broke of out the uptrends in our daily indicator that have been in place since March. The technical situation is better in the Eurozone and Japan, while the level of financial repression is China so severe, in our view, that the indicator has lost most of its signalling power.  [Read More... ]

Income in Dollars, Please

Generating an adequate income from euro-denominated bonds is next to impossible, so investors should abandon the attempt. They should embrace currency risk – not try to hedge it away. They should enjoy the fact that US dollar yields are structurally higher than those in the Eurozone. This means owning long-dated Treasuries and dollar-denominated EM sovereign bonds. Finally, they should consider the source currency of their equity dividends and take another look at the Energy sector.  [Read More... ]

Two Week Warning

Our standard PRATER process is well-correlated with the subsequent performance of equities vs bonds. However, the relationship decays when we get close to extremes. Here, we can use a modified RSI approach to estimate the potential for mean reversion. Our 25-year data set indicates that equities are particularly vulnerable when they have been accelerating too hard (RSI) in relation to the speed at which they are travelling relative to bonds (PRATER). Presently, they are accelerating too hard, but the difference is not yet critical. At current progress, global equities will enter the danger zone in about two weeks, after which the probability of a high single-digit correction vs bonds rises sharply.  [Read More... ]

Equal and Opposite Signals

The macro picture remains confused, so we are reduced to talking about signals which may appear in the near future. On present trends, we expect EM Equities to overtake their moving average and EM Bonds to drop below theirs. Both are measured relative to the equity and fixed income models as appropriate. At first, the switching opportunity would be for EM specialists, but it may develop wider significance.  [Read More... ]

New Risk Conditions Indices

This week we introduce four new risk conditions indices covering the equity and government bond markets of selected emerging market and developed countries. They highlight the fact that the relationship between equity and bond volatility is abnormal, given their recent relative performance.  [Read More... ]

Capitulation and the rule of 35

Equity bears are capitulating. The priority is to protect their portfolios from further underperformance by getting closer to their benchmark equity weight. Our models have always shown that the worst sample periods for our process are between 29-35 weeks. The behavioural explanation would be that fund managers are allowed to be wrong for two quarters in a row, but not for three. Cutting a losing position during the third quarter of the mistake tends to be more damaging than doing it early in the second.  [Read More... ]


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