Swissquote: Risk appetite improves as sovereign bonds rally

1 maart 2021

By Ipek Ozkardeskaya, Senior Analyst at Swissquote 

I reckon, it’s odd to see the sovereign bonds rally as the risk appetite improves. But following last week’s bloodbath, the sizeable easing in sovereign bond yields is a big relief. The sovereign market has become a risky play. 

The Australian 10-year yield fell more than 20 basis points, as the Reserve Bank of Australia (RBA) doubled its bond purchases to stop the heavy bleeding that smashed the investor sentiment last week.  

This is the magic of the central bank’s massive bond buying programs. Nothing can really go wrong as long as central banks buy as much debt as needed to keep the yields where they want them to be. The latter is true for the Federal Reserve as well. And the only fact that investors know the Fed can act should be enough to temper the worries in the short run.  

The US 10-year yield is back to 1.40%. And more importantly, the short-end of the US yield curve pared a good part of last week’s spike, which should help easing the short-term liquidity worries. 

As such, we will probably see stabilizing sovereign yields this week, which should give investors a sigh of relief after the past week’s tumultuous market environment. 

The ASX (+1.74%), Shanghai’s Composite (+0.88%), Hang Seng (+1.30%) and Nikkei (+2.40%) gained. 

Activity in FTSE and US futures hints at a bullish start on Monday. 

Nasdaq futures lead gains as investors are ready to return to their tech darlings at better prices. 

Is the turmoil over? Certainly not. The discussions regarding the rising inflation expectations will only get louder after Joe Biden’s $1.9 trillion additional rescue package passed the House on Saturday and is now headed to the Senate. It’s going to be a tight play as all Republicans and some Democrats think it’s too big. Biden cannot afford to lose a single Democrat vote. But in theory, the proposal could get approved and become reality in a very close future. Biden wants the package approved before March 14. Investors still have a mixed feeling regarding the package. On one hand, fiscal stimulus should boost the investor sentiment as it will help improving demand and the economic activity. On the other hand, the fear of economic overheating could threaten the Fed’s supportive policy despite Powell’s full commitment to maintain the financial conditions as loose as possible until a substantial improvement in the US jobs market.  

On the data front, the Chinese manufacturing PMI fell to the lowest in nine months in February. I wouldn’t be too worried given that the activity during this time of the year, the Chinese New Year period is generally very limited. Although the second consecutive-month fall in new orders and exports are not happy news, we shall see a rapid improvement in the coming months with the prospects of an imminent normalization in global economic recovery.  

Speculative positions tell the story 

We don’t need CFTC data to guess that there have been enormous outflows from US treasury yields lately. But the fact that investors cut their long positions and turned short in Nasdaq, and cut their short positions in S&P500, while remaining short, confirmed the migration from growth to value stocks. But more importantly, gold speculative positions were cut to the lowest since last June on the back of an impressive jump in US yields that convinced investors to abandon their inflation hedges that suddenly became too expensive. On the other hand, net speculative longs in aluminum and copper advanced bringing forward the idea that commodities could actually be a better hedge against inflation than the traditional gold.