As 10-year US Treasury yields hit a three-month high of 3%, investors have differing opinions on how to navigate the market.

Here, three Geneva-based wealth managers explain their views.

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As 10-year US Treasury yields hit a three-month high of 3%, investors have differing opinions on how to navigate the market.

Here, three Geneva-based wealth managers explain their views.

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Christophe Karpiel

Partner and head of investment solutions, Stanhope Capital

 

In 2017, central banks have bought more bonds than have been issued by governments. That pushed the interest rates down artificially. However, in 2018 and 2019, this will no longer be the case.

We are cautious on equities because for now the rate rises have been slow and not so significant, but if they rise faster and bring more volatility then this will impact the equity market in two ways. On the one side, the discount that is used to value equities will be higher, so that will impact their prices. And on the other side, when there are better rates on bonds, it might be worth selling equities and purchasing bonds instead.

The ECB will have to adjust its interest rates at some point, but the current inflation level does not push them to act fast.

Personally, I am not investing in 10-year US Treasurys at the moment, but I am considering it. At the moment it is difficult to understand where to invest, but in the long run it might be good to have some long-term Treasurys.

If bond yields reach 4% it will be difficult for equity markets to stay on the rise.

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Edward Maeder

Banker, Cité Gestion

 

We think that this is the upper bound of the current range of the US 10-year Treasury yield. At 3.05%, we are adding duration to our portfolios. Currently, there is no reason for the yield to rise further, given that inflation hasn’t surprised on the upside. The unemployment rate is low in the US, but there still seems to be little wage growth pressure. In the medium to long term, if the US economy continues to expand at the current rate, we expect to see rates rising a bit further. But first the 10-year Treasury yield will consolidate back to 2.8% or lower.

We have been anticipating slightly higher interest rates. However, at levels above 3%, US investment grade fixed income is attractive and we are seizing this opportunity by adding high-quality bonds with a medium duration to our portfolios. For portfolios with an underweight to US Treasurys or investment grade bonds, this is a good moment to add exposure.

In the eurozone, purchasing managers indices have  fallen a bit recently, which could point to a mid-cycle dip. Inflation also remains subdued and below target, and therefore we don’t believe that the ECB will increase rates in the near future. However, everything will depend on when and by how much the ECB will begin to reduce its asset purchasing programme, and this in turn will depend on economic data in the eurozone.

It is difficult to estimate the impact of the US 10-year Treasury yield hitting 3%. If economic data and specifically inflation justify higher rates, then the market can digest slowly rising interest rates.

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Julien Jammet

Portfolio manager, Pentagram Wealth Management

 

There is nothing to worry about. The 10-year Treasury yield reaching 3% is just a reflection of the health of the US economy. It reflects higher inflation expectations and the gradual vanishing of the largest buyer of US Treasurys – the Federal Reserve. As a consequence, we are not exposed to the long part of the US curve to avoid the duration risk.

On the bond side, we focus on credit and we monitor a possible widening of the credit spread, which would be more worrying than the US 10-year Treasury yields reaching 3%.

The equity weakness in February was a direct consequence of the repricing of the bond curve. However, EPS revisions were positive during the period, making equities attractive again.  

Meanwhile, the bearish flattening of the curve has made cash more attractive. Cash now offers a positive yearly return of 2% and will act as a buffer in a higher volatility regime. 

I have no doubts that the ECB will adjust the interest rates. With the 2.3% growth expected in 2018, it becomes increasingly challenging to defend negative interest rates, but if the repricing of the curve is too rapid, it will revive the spectre of the government debt crisis. The ECB has to find the right balance in order to avoid it.

At the moment, we do not invest in 10-year Treasurys as the risk/reward balance has not become attractive enough.

There is a possibility that the yields of the 10-year US Treasurys will reach 4%, but it will be closely linked to the pace of inflation and economic growth. First, let’s see whether the Fed sticks with its scheduled four hikes for this year and whether there is any impact on economic activity.

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