CFA, Credit Strategy
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CFA, Credit Strategy
After two years of positive performance across the board, with almost no asset class in negative territory, 2018 is marking a change of direction, with an unprecedented percentage of asset classes in red. This may cause a sense of uncertainty among investors facing uncharted waters ahead. The challenge has been even bigger for European investors still living in a zero-rate environment, facing the challenge of no returns on the bond side and losses across all risk assets, exacerbated by idyosincratic stories such as the Italian budget confrontation and by the still uncertain Brexit scenario.
Pascal BLANQUE, Vincent MORTIER
Didier BOROWSKI, Vincent MORTIER, Qinwei WANG
Last summer, the machine has become unsettled. The financial markets have been in the doldrums, everything (Fed, ECB, China, Yuan, oil, etc.) has become subject to a negative interpretation. It is therefore easy to understand why we have witnessed the repricing of risk and the implementation of portfolio protection, and even in some cases the liquidation of positions. Why have we reached this situation? Was it entirely justified?
Global Head of Research
Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that former Fed Chairman Alan Greenspan described their behaviour as a “conundrum.” Comparing long-term rates to their theoretical level based on fundamental valuation models, we show that the anomaly was on average 40 bps. Various explanations have been put forward for this, including investors' changed attitude to risk, and the rise in US Treasury purchases by different categories of buyers. We show that, while these variables could theoretically be responsible for the decline in bond risk premiums, they explain less than half of the anomaly when incorporated into a fundamental model of bond yields. However, their recent changing influence could justify their being used for a prospective analysis of bond yields.
Ombretta SIGNORI, Kokou TOPEGLO