September’s Aggressives Sell-off Wipes Out August’s Yield Drop

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In August, leading global markets recorded lows, something that benefitted bond bulls. Some investors are now viewing August as the only low they will have to go.

This comes at a time The Federal Reserve is expected to reveal its policy decision on Wednesday while it’s Japanese counterpart will follow suit on Thursday. In normal circumstances, we should expect bond prices to rise despite the sudden change in global money markets recorded this week.

However, expectations for the extent of easing have slowed with investors concluding that benchmark yields troughed a few weeks ago.

Looking at Treasury yields, it is clear that September’s aggressive sell-off has overturned a significant percentage of the yield drop. Notably, the 30-year Treasury yield dropped to an all-time low of 1.90% in late August, from above 2.5% at the end of July. Currently, the return has moved back to 2.25%.

This can be explained by the fact that investors are yanking money from Treasury exchange-traded funds. This comprises an all-time high drain in five years from BlackRock Inc.’s iShares ETF. Most investors are watching from the sidelines while others have a focus on removing the froth from significant bond markets.

Potential For Higher Yields

Merian Global Investors asset manager Mark Nash has expressed confidence in positioning for higher yields, due to potential improvements on several fronts. He looks at global growth, Brexit, Italy’s political problems, and the trade war, and the Saudi oil attack. He notes these development have not impacted this outlook.

Nash’s view might not be popular among other investors based on various factors. According to Kathryn Kaminski, from AlphaSimplex Group investors should not view this month’s jump as an end to the bull run.

Neutrality Ahead of Federal Reserve Policy Decision 

On the other hand, analysts drawn from Wall Street have shown their preferences for a neutral stand on global rates pending communication from the federal reserve. During the announcement, the reserve is highly expected to cut rates by a quarter-point for the second meeting in a row.

At the same time, the U.K. might be having investors looking for a more-compelling bear case in government markets. Mark Dowding from BlueBay Asset Management believes that we might have a climbing gilt yield because there is a chance that markets are overestimating the extent of easing by the Bank of England. Note that the 10-year U.K. bond’s yield dipped to 0.34% in early September before shooting up to 0.68%. Generally, Dowding views the U.K. market as an early mover in a broader theme.

Compared to the U.S., the Federal Government is piling up deficits. According to PGIM Fixed Income’s Michael Collins says swelling debt sales are finally starting to have an impact on Treasuries.

But Mark Kiesel at Pacific Investment Management Co. notes that the push for higher spending in the U.S. will not spur higher yields. He notes that the market will not go back to the lows of August because Trump will not support a punitive financial policy since he is eying reelection.

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Justinas Baltrusaitis

Justin is an editor, writer, and a downhill fan. He spent many years writing about finances, blockchain, and crypto-related news. He strives to serve the untold stories for the readers.

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