Which alternative strategy to hedge against abond sell-off?

By January 7, 2020 15:20

Which alternative strategy to hedge against abond sell-off?

The year that has just started will challenge investors’ expectations, just as 2019 eventually contradicted the bearish mood that prevailed one year ago. For the time being, risk appetite remains strong and we believe it is unlikely to be derailed by renewed geopolitical tensions. But cracks have appeared in fixed income, with the Barclays Global Aggregate down in December for the fourth month in a row. One scenario for 2020 that does not appear to be priced in is a sharp normalization in bond yields that would drag equities lower. This is something to monitor because last year’s expansion of equity multiples looks unsustainable if the rise in bond yields accelerates, especially as the EPS growth consensus looks too optimistic, at c. +10% in the U.S., EMU and Japan. Our stance on fixed income is defensive (U/W 10-year Bunds, short duration in the U.S.) but the speed of the adjustment matters. Recent business surveys suggest that manufacturing activity remains sluggish. In that context, our base case for Q1-20 is a modest rise in bond yields that can be absorbed by equity markets. Our worst case would be a scenario such as Q2-15, when macro data releases suddenly beat expectations in the EMU, translating into a dramatic rise in bond yields and a sharp fall in equity markets in the region. 

By January 7, 2020 15:20



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January 2020