The strengthening of the dollar and the trend in rates
The recent presidential elections in the United States had an immediate and significant impact on global markets. The American dollar showed significant strengthening, recording its biggest daily increase in more than two years. This movement also affected government bond rates, with 30-year Treasury yields rising by about 20 basis points, closing at close to 4.50%. These changes were fueled by expectations of a new political scenario that could result in an increase in the deficit and a fiscal deterioration
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Steepening of the interest rate curve: what does it mean?
One of the main themes that emerged in the post-election bond market is the phenomenon known as the “steepening” of the rate curve. This phenomenon occurs when long-term returns rise faster than short-term returns. Expectations of an increase in the fiscal deficit, together with supply pressure on the long part of the curve, have prompted investors to request a higher term premium. In addition, the action of the Federal Reserve, which continues to reduce its balance sheet, contributes to this scenario, making the rate curve steeper
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Investment strategies in the current environment
In this market environment, investors are called upon to review their strategies. Many portfolios have been managed with an extremely low level of risk, maintaining a cash position to take advantage of any volatility movements. Currently, there is value in maintaining an approach that exploits the steepening of the US curve, with particular attention to the 5-30 year bucket. Opportunities in the middle of the curve, from 5 to 7 years, are emerging, especially in securities from solid issuers that offer significantly higher returns than
similar European securities.
Risks and opportunities in the stock market
It is crucial to consider the risks associated with this scenario. A rapid rise in long-term rates could lead to a significant correction in risky assets, especially in the European stock market, which is more sensitive to long-term rates. After a strong rally, valuations are at the high end of the range, in a context of economic slowdown and geopolitical risk. Investors must therefore be cautious and consider implementing protection strategies to mitigate volatility risks
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