Chart of the week
With the announcement of the new Omicron variant on November 26, fixed income market interest rates fell significantly. Investors seem to have anticipated an increased risk of national lockdowns, considering that such a scenario would be associated with prolonged monetary support from central banks. Between November 25 and December 6, the 10-year Bund yield lost 15 basis points, dropping from -0.24% to -0.39%*. In both Europe and the United States, the long end of the yield curve was particularly affected.
This downward movement in fixed income yields is occurring at a time when most regions of the world are seeing a strong resurgence of inflation. Several central banks have been engaged in a new interest rate hike cycle since September. In the United States, the Fed is preparing the public for a more restrictive monetary policy.
In this context, sovereign rates on the fixed income market already seemed abnormally low before the announcement of the new Omicron variant. Real interest rates, corresponding to nominal rates minus inflation, were at historically low negative levels in both Europe and the US. The further decline in yields, observed at the end of November, increases this imbalance.
As inflation continues to rise, particularly in Europe, central banks have little leeway to maintain ultra-accommodative monetary policies. Market expectations, which are excessively cautious about the rise in interest rates, seem to us to be out of step with the next steps for the year 2022. The gradual end of central bank support, coupled with sustained growth, should result in a rebound in bond yields in the months ahead. For this reason, in some of our portfolios we opt for “negative duration” strategies, in order to benefit from a rise in interest rates.
The following opinion was written on December 10, 2021 and is susceptible of changing.
*Sources : Bloomberg, and calculation from Lazard Frères Gestion
As of : December 10, 2021
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