Have government bond yields reached a low point that will signal the end of the bull market for bonds (which started in the early 80s) ? Well according to some commentators, this might be it. And the recent bond selloff is just a reflection of that.
The point is disputed by other market participants. According to Citi’s strategists, bond yield are destined to stay low for some time. The last selloff is just a reflection of markets’ disappointment following the last ECB announcement to hold its monetary policy unchanged and to not expand its QE program.
If there were to be a long rise in bond yields, what would be the appropriate positioning ? Citi’s strategist offer the following view:
« Historically, higher bond yields have been associated with stronger growth expectations which boost equity and commodity prices. The yen tends to depreciate and Japanese equities outperform. Rising bond yields help cyclicals outperform defensives. Underweighting high dividend yield and/or minimum volatility strategies should also help portfolio performance. Citi strategists think Financials would benefit from rising bond yields. Banks in Europe and Japan would gain the most, in our view. » (source: Global Equity Strategist, September 22).
In the following chart, there is a broader view of long/short ideas in a rising yield environment: