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.