After the massive rotation from equities to bonds, the Trump rally could further impact bond ETFs in several ways
Since the US election, equities worldwide have gained US$1.7 trillion, while bonds have suffered a similarly impressive loss of US$1 trillion. Whether this movement from investor speculation and sentiment can be sustained is uncertain. But ETFInsight Managing Director Yves Rebetez recently shared how she thinks bonds and bond ETFs could be affected down the road.
“We may well have entered a new regime, featuring a combination of fiscal stimulus and hotter-than-normal inflation,” Rebetez said in a piece published by the Financial Post. “In that scenario, bonds – and by extension, bond ETFs – could remain under pressure for some time.”
She went on to predict that overreaction from the markets could cause investors to liquidate, thus putting pressure on prices and starting off a chain reaction of panic-based selling. “This means higher yields will be on offer, and that could present opportunities for those willing to trade against the excesses they believe have materialized,” she said.
Another consideration cited was the probability of market participants factoring in further Fed rate hikes by 2017, a movement that Rebetez predicted “may lead to at least a temporary respite from surging yields.” Furthermore, she noted that massive levels of indebtedness around the world should limit the degree to which the economy could sustain its forward momentum, which she said could contain further bond losses going forward.
Rebetez also called November’s market movements as a “rude awakening” for investors who had not hedged against duration risk, as longer-duration bond ETFs sustained heavier losses while credit acted reasonably well.
“Remember Operation Twist, the US Federal Reserve’s strategy aimed at flattening the yield curve? Gauging from the market’s reaction to Trump, it is fair to say that operation has been relegated to the history books,” Rebetez concluded.
Related stories:
Fed makes interest rate decision
No break for active managers despite Trump tailwinds
“We may well have entered a new regime, featuring a combination of fiscal stimulus and hotter-than-normal inflation,” Rebetez said in a piece published by the Financial Post. “In that scenario, bonds – and by extension, bond ETFs – could remain under pressure for some time.”
She went on to predict that overreaction from the markets could cause investors to liquidate, thus putting pressure on prices and starting off a chain reaction of panic-based selling. “This means higher yields will be on offer, and that could present opportunities for those willing to trade against the excesses they believe have materialized,” she said.
Another consideration cited was the probability of market participants factoring in further Fed rate hikes by 2017, a movement that Rebetez predicted “may lead to at least a temporary respite from surging yields.” Furthermore, she noted that massive levels of indebtedness around the world should limit the degree to which the economy could sustain its forward momentum, which she said could contain further bond losses going forward.
Rebetez also called November’s market movements as a “rude awakening” for investors who had not hedged against duration risk, as longer-duration bond ETFs sustained heavier losses while credit acted reasonably well.
“Remember Operation Twist, the US Federal Reserve’s strategy aimed at flattening the yield curve? Gauging from the market’s reaction to Trump, it is fair to say that operation has been relegated to the history books,” Rebetez concluded.
Related stories:
Fed makes interest rate decision
No break for active managers despite Trump tailwinds
