Strategists at RBC Capital Markets have warned that the consolidation in the bond market is coming to an end, advising investors to consider shorting ten year U.S. Treasury Bonds and UK gilts.
Issuing a note to the market, RBC confirmed it had taken profits from a position that backed the tightening of the spread between German bunds and ten year UK gilts.
The note also confirmed that RBC has taken up short trades on the 10-year U.S. Treasury and UK gilts.
10-year U.S. yields recorded this week seemed to indicate RBS strategists have hit the right note, increasing by 1.6234% on Wednesday.
City Index, a provider of spread betting guides for the UK market, have been carefully eying the bond values in recent weeks.
The global response to developments over the last year is a significant factor in the value they say.
With the governments efforts worldwide allowing economies to recover, potential increases in inflation have triggered concerns that the respective central banks may start to reduce the unprecedented current levels of monetary support.
The Impact of Re-Opening
There is no doubt that recent events have brought some unease in the markets, but current signs suggest that this won’t impact on the economic re-opening.
Peter Schaffrik, Global Macro Strategist for RBC said that future fears have already been priced in. He also pointed out the recent suggestion that mRNA solutions could be more effective than previously thought as a significant source of support.
The speed of the medical programmes in many European countries, plus the warmer weather arriving in the Northern Hemisphere - making outdoor activities more attractive - could also be significant. This could help to keep any adverse effects to a minimum, even as restrictions are eased.
However, Schaffrik cautioned that challenges remain in the market, especially as travel restrictions remain in place. Plus any return of what was experienced during the last 12 in emerging markets could impact the availability of raw materials and put pressure on prices.
All of this means that the concerted move towards lower yields is starting to reverse. This is particularly the case for UK and US bonds which have outperformed their European counterparts. Bonds are the only exception, standing firm against the downward trend.
Schaffrik has pointed to central banks' responses around the world as an indication that there may be a move to hawkish grounds. Bank of Canada seems particularly keen to move in this direction, making it unlikely that the European Central Bank or the US Federal Reserve will adopt a bullish stance on the bond market.
The Bank of England's May 06 meeting resulted in a hawkish pivot, amidst the opening of discussions around normalisation and tapering.
The RBC analyst expects trends to return to what was seen earlier in 2021, with a rise in bond yields.
RBC weren't the only analysts making these predictions, with Jeffries agreeing with the outlook in a separate note.
Aneta Markowska, U.S. economist at Jefferies, has forecast that the U.S. 10-year bond will hit 2% by the close of 2021.
Markowska went on to suggest that with a return to full employment in the labour market by mid-2022, there will be 3% growth next year with approximately 6-6.5% recovery built into the current price.