Payden & Rygel: Moves in the global bond market
The bond market is showing signs of anxiety with yields across many markets rising, yield curves steepening, and rates volatility picking up. There’s been a range of (fundamental and technical) factors contributing to the bond sell-off over the past few weeks, in particular:
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The repricing of recession risk at the beginning of May on the back of the announcements of the 90-day pause on reciprocal tariffs, with investors pricing less economic damage from tariffs and removing some of the interest cuts that had been priced in the US in particular,
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More recently, the shift towards fiscal concerns, fears of larger deficits and deteriorating debt trajectories in the US but also in other countries such as Japan,
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Unease around structural demand-supply imbalances in global government bond markets,
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Positioning adjustments in widely held positions and in some cases, frictions in dealers-intermediations, exacerbating the bond sell-off.
If we break out government bond yields into their components, the recent rise in yields has largely been driven by rising term-premium while inflation expectations have stayed broadly stable. In other words, this time, investors don’t seem to be worried about inflation, rather they want to be compensated more for the interest rate risk that they are taking.
What does this mean for your own positioning?
In terms of positioning, we favour exposures at the front end of yield curves and prefer to stay away or underweight further out the yield curve. In other words, we like positioning portfolios for steeper curves in this environment.
