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Fixed Income Update | An Uncomfortable Equilibrium

Jeffery Elswick | August 04 , 2020

An Uncomfortable Equilibrium

The fixed income markets are settling into an unstable and uncomfortable equilibrium, with several short-term trends looking likely to carry over into what looks like the medium term. A weaker U.S. dollar, a spike in gold price to all-time highs (in dollar terms), rising risk assets such as stocks and high yield bonds, rising inflation expectations—albeit from low levels–and, the biggest of them all, a fall to all-time lows in U.S. Treasury nominal yields, have translated to negative real yields. The idea that all these factors are all occurring simultaneously during a period where we’re seeing a large decline in volatility is concerning–or at the very least eye catching—and probably unsustainable. Accurate predictions as to the timing of changes with any market are always difficult, and this situation is no different. But while the timing may not be clear, I am dubious all of these trends can continue for the remainder of the year. While any one of these conditions could be the first to reverse, I will focus on the one nearest to my focus, which also is the one that appears to me to be the biggest outlier relative to the others—historically low nominal U.S. Treasury yields.

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