How have bond markets reacted to the weakness in equity markets?

      

Feb 6, 2018 | Alister Brown

While bond yields had been edging higher recently, the equity market moves have seen limited impact on bond markets.

The US 10-year, which closed last week at 2.84%, dropped to 2.71% at the US close (it’s now back at 2.75%). Gilts yields are 4bps lower at 1.52% and Euro govvies 1-3bps lower.

In credit, US IG was +0.25%, HY -0.22% yesterday (Treasuries +0.33%). In spread terms, IG was +1bp and HY +12bps. HY EFTs saw some outflows so we may see some further weakness (our two HY Investment Trusts have both seen their premium to NAV disappear as the share price has fallen back, a good illustration of the equity-led nature of this volatility).

We’ll need to wait until the close for the UK and Euro indices, but looking at current prices there is not a lot to talk about in Europe (at least for now). AT1s are down 1-1.5pts and are attracting buyers. Outside of financials IG spreads are 3-5bps wider and in HY bonds are being shown 0.5-1% lower.

Overall, this looks like a sharp equity reaction to a weeks-long build-up in core bond yields. Those rising yields have been depressing our returns, but corporate bonds have been relatively strong and this, combined with defensive positioning, means our funds have been holding up quite well. We have lots of liquidity and are in a good position for this type of market.

Elsewhere, Bitcoin is -27% since the close on Friday and VIX at its highest level since August 2015 – there is an inverse VIX ETF which is -96%!