Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
Contrary to what the Federal Reserve thinks, low US Treasury volatility is dangerously explosive
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Following the Fed meeting last week, we have seen the MOVE index falling to historic lows. Although low volatility is what the Fed is looking to achieve, we believe that it creates even higher market risk as we are approaching the US election.
I cannot say it enough: US Treasuries are the biggest mousetrap of all time.
As we explained in an article we published last week, near-zero yields offer just a limited upside for investors while the downside remains large. On top of it, volatility in US Treasuries has sunk to the lowest level seen in history, making them even less attractive.
I am shocked to see a number of articles discussing how the US yield curve steepened during Friday’s afternoon session as the stock market was sliding. Is it worthwhile to pay attention to a one basis point movement in 30-year Treasury yields amid a selloff in the equity market? Maybe I am becoming too old for this game, but I cannot bear news channels discussing government bonds' movements when there is none.
At the moment, the yield curve is dead. We will not see it moving on the basis of monetary policy expectations because the market has received the Fed's message loud and clear. What the Fed has failed to see, however, is that as the US election approaches, volatility in US Treasuries is going to resume in any case. In this context, the attempt to eradicate market volatility actually might cause even higher uncertainty.
The anxiety surrounding the US election is mounting. Everybody knows that this will be an election like no other where we’ll most likely see a significant delay of the results amid postal ballots.
By keeping interest rates low for longer, the Fed is producing the unwanted side effect that whenever there is volatility, market reactions will be amplified. In the destabilizing case of a selloff, panicking investors will sell whatever is hot in their portfolio. At that point, the market will find out that risky assets have become riskier because of the Fed low-interest rate policies. As a matter of facts, companies have been leveraging up their balance steadily as the Fed was cutting interest rates, contributing to a vulnerable system apt to selloffs. It’s a vicious circle, which will never stops. When the Fed perceives panic, it will implement Modern Monetary Theory policies. Hence, companies start to take on more debt until volatility manifests itself and the Fed will need to act again. Only that volatility will be every time higher than before.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)