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Portfolio perspectives | Article - 1 Min

Graph of the week – Volatility in bonds creates opportunities

A flight to safety in the wake of the failure to two US banks led to an abrupt fall in the yields of short-dated government bonds in both the US and Germany. Our chart of the week shows the precipitous fall of yields in 2-year US Treasury notes and 2-year German government bonds.  

US 2-year yields fell by 61 basis points on 13 March, marking the biggest one-day fall since 1982. German 2-year Bund yields fell by 41bp. Again, this was the largest single-day drop for at least 30 years. Yields of German 10-year Bunds dropped by around 55bp.

In the view of our multi-asset team, the extent of the falls in German yields is unwarranted, as are the declines in ECB policy rate forecasts through end-2023. European economic fundamentals have not changed: eurozone inflation remains sticky, labour markets are rigid, and recent wage settlements will likely contribute to inflationary pressures. There is also significant bond issuance to come in 2023. For these reasons, our multi-asset team took advantage of the fall in German bond yields on Monday to initiate an underweight position relative to their portfolios’ benchmarks.

At this time, the consensus view is that the demise of Silicon Valley Bank and Signature Bank will not have major implications for the European banking sector. Compared to US banks, European large-cap banks rely more on sticky retail deposits gathered through cross-selling across their networks. They are more diversified in terms of product mix and geographic mix than mid-sized US banks such as SVB and are more heavily regulated. Almost all European banks are considered as globally or domestically systematically important banks. Also, liquidity ratios are high at around 150% in Europe.  


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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