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Tuesday, February 16, 2021

US 10 Year Yields Rally & Reflation Demystifying the Past Movers & Shakers

تم إعداد هذا المنشور من قبل سنشري للاستشارات

US 10 Year Yields Rally & Reflation...
US 10 Year Yields Rally & Reflation Demystifying the Past Movers & Shakers

*This performance is only observed with historical backtests and not traded by the company.

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Market discussions & prospects of further rise in US 10 year yields is gaining more investor attention with every passing day. Not only are markets pricing in higher inflation numbers as seen from the latest US consumer surveys as well as the 5 year inflation break even swaps, there is a growing sense of realization amongst the market participants regarding a new commodity super cycle. The entire discussion has now boiled down to one popular economic theory – Reflation.

Are Reflation & Inflation the same?

Reflation is characterized as return to the earlier growth output after a major & significant economic downturn. A reflationary cycle typically has components of rock bottom interest rates combined with ultra loose fiscal & monetary policy measures. Reflationary trades in turn lead to higher inflationary expectations in the real world.

Elements of Current Reflationary Trade
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Record US fiscal stimulus spending (expected to exceed $4 trillion once new US administration measures are passed)
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Ultra loose monetary policies
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Future demand recovery on back of vaccine availability
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Prospects of passage of US government’s plan to increase minimum hourly wage to $15
Performances of other assets during previous yield spike episodes

The below performance analyzes 3 major instances of rally in US 10 year yields. Performances are based on the returns for that particular period. Contrary to the popular perception of rise in yields being negative for equities, US SPX index has in fact rallied over the term of the yield increase in each of the 3 instances. Although these periods did involve some amount of knee jerk reaction in US equities, over the longer term, markets have always risen positively. Baring the current instance where gold has rallied along with US yields, past 2 events have seen gold slipping down. Gold’s current gains are primarily on account of its last year’s safe haven rally. In each of the last 2 instances, commodities slipped with rising yields as seen by downfall in Bloomberg Commodity Index. This time however, as the world steps out of the ill effects of pandemic, markets are expecting an even stronger commodity bull run.

US 10 Year Yield Comparison with other asset classes’ (2005-2021)

Returns over the Event Period
Sr No Yield Increase Event(Period where the yields have spiked up by large amount) Duration US 10 Year Yields SPX Index Gold Dollar Index Bloomberg Commodity Index
1 Fed Taper Tantrum July'2012 - December'2013 82% 34% -23% -1% -8%
2 Post Trump Election Euphoria (Hopes of large fiscal spending) Fed emphasis on stronger growth June'2016 - October'2018 82% 30% -1% 3% -4%
3 Post Pandmic Reflation trade on back of record US Stimulus March'2020 - Current 119% 32% 9% -6% 19%

US 10 Year Yield & other asset classes’ performance

Risks & Assumptions

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The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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