Need to Know This Week:
Carry is King

  • Global QE has been putting lower pressure on bond yields and flattening pressure on yield curves, eating into opportunities in liquid government bond markets, leaving investors hungry for carry. 

  • QE has also dampened bond yields’ volatility, boosting carry attractiveness in risk-adjusted terms.  

What are our favourite carry/risk investing strategies?

  • Global bonds would currently look unattractive from the perspective of cash rich EZ and Japanese investors.  On a currency-hedged and risk-adjusted basis only BTPs, KTBs (Korea Treasuries) and CGBs (China govt. bonds) would offer those investors a relatively attractive yield pick-up. 

What are the risks to exploiting the carry there? 

  • In recent years BTPs, KTBs and Chinese bond spreads to UST tightened as 10y yields rose. 

  • If the rise in long-dated benchmark bond yields is supported by an improving growth outlook (not our base case) and not matched by CB policy rate hikes, sovereign credit spreads could remain well-behaved even as benchmark bond yields rise.  

Need to Know This Week: 
Carry is King

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