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Thursday, March 23, 2023

Bond expert predicts a new chapter in the US bond market after the yield rally

Long-term US bonds have already experienced quite a ups and downs in the wake of the corona crisis. After the upward trend in March 2021, the yields of US bonds with a ten-year term then continuously fell. However, market expert Scott Peng claims to have identified a trend reversal.
• US bond yields in rally mode in the first quarter of 2021
• Second quarter brings the disillusionment
• Scott Peng bullish on US bonds

The corona crisis has not only caused all sorts of turbulence in the financial markets. The effects of the still unresolved crisis are also clearly noticeable on the bond markets.

This is particularly evident in the course of long-term US government bonds. While ten-year bond yields hit historic lows at the end of July 2020, this was followed by a rally that culminated in March 2021 with a rise of 83 basis points. Since then, however, it has fallen again by 60 basis points.

New chapter opened

As market expert Scott Peng of Advocate Capital Management explains in a market analysis on the company’s website, the US bond market may now have entered a new phase in the “rate rise saga”, in which the yields on US long-term bonds will rise.

That is why investors increasingly turned to bonds in the second quarter of the year

Peng cites the following reasons as the background to the rally on the bond market in the second quarter of 2021, which led to the gradual decline in yields by 60 basis points: After all signs were pointing to economic recovery in the first quarter of 2021, various economic data already showed a slowdown in the second quarter of the year of the boom. For example, the unemployment rate would have increased again in April for the first time since the pandemic peak and other economic indicators would have lost momentum.
In addition, the new and extremely contagious Delta variant would have created increasing uncertainty. Even if it had been shown, especially in countries with great progress in vaccination, such as Europe, that the wave of infection triggered by Delta would have been much smaller than initially feared when the variant emerged.
As a final point, Peng cites upheavals from market participants such as hedge funds, which would have reduced many short positions in the second quarter.

These factors usher in the new era in the bond market

Even if government bond yields fell in the second quarter of the year, Peng assumes that various macroeconomic developments mean that these should rise again from now on.
The market expert names the inevitable tapering of the US Federal Reserve as the first factor here. Advocate Capital Management assumes that this should start as early as the beginning of 2022. Indeed, the recently published minutes of the monetary watchdogs revealed that the majority of the members believe that a reduction in monthly bond purchases would still be possible this year.
In addition to the impending tapering, Peng believes that the planned massive stimulus programs should lead to bond yields rising again. After all, the government is forced to build up a larger deficit within the framework of the trillion-dollar aid that has been decided.

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The generous stimuli should in turn lead to a strong rebound in the US economy, a phenomenon that is already apparent. As daily life normalizes, consumers are also likely to spend more of the money they saved during the lockdown and fuel the economy.
Even in the current phase of economic recovery, however, companies are already realizing that there is a shortage of workers. Peng assumes that this labor shortage will not turn out to be a temporary problem and thus also lead to rising bond yields.

Scott Peng’s conclusion

In the opinion of Advocate Capital Management, all these developments mark the beginning of a new chapter in which rising yields on the US bond market should beckon. This is Peng’s conclusion in the analysis: “Despite the delta variant, higher returns are inevitable in our opinion. Higher ones interest rates are driven by various factors such as a non-temporary shortage of labor, rising inflation, more stimulus programs, enormous government deficits, and a growing supply of government bonds to finance the deficits and the impending tapering of large-scale, price-independent bond purchases by the central bank. “

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