Financial markets have started April strongly and the rotations that characterised much of the first quarter have eased. The move higher in US Treasury yields that had triggered market and asset class shifts peaked at the end of March, briefly touching 1.75% in the US 10-year Treasury yields, before falling back to 1.55% by mid-April. In sympathy, the opening weeks of April have seen global equities rise c. 5%, the Dollar index fall -2.3% and Gold rise nearly 5%. For now, investors continue to look through the risk of COVID-19 virus mutations, vaccine concerns and infection surges in countries such as Brazil and India. Headline grabbing stories covering the blockage of the Suez Canal and collapse of US family office Archegos, also had little lasting influence on market sentiment.
Somewhat surprisingly, the reversal in US Treasury yields has taken place against a run of strong US data releases, however, there seems to be a series of reasons behind the move, not least a loss of momentum following the worst quarter for US government bonds since the 1980’s. Fundamentally government bond yields have already adjusted a great deal for stronger growth and inflation expectations, but they had also moved well ahead of the Federal Reserve’s path of future interest rate forecasts. Successful treasury auctions together with the Federal Reserve’s consistent message of no change in policy until significant progress is made towards their average inflation and full employment objectives, unsettled market positioning that was looking increasingly stretched.
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