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.