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David Greichen
Dissonance is the best way to describe the current market. Markets are up and down every other day against the backdrop of conflicting policies from major central banks.
For example, last month the bank The United Kingdom (BoE) has announced that it will postpone the quantitative tightening (QT) and resume buying long-end gold coins.
Conversely, the Fed maintains a resolutely hawkish tone as members of the Federal Reserve continue to delve into two key points. With its actions, the BoE has introduced two-way risk to the market, even if only temporarily.
So where are the investors going?
According to Street, some notable flow trends are emerging in this high interest rate environment. The flight to quality trading continues and short duration funds are part of the yield curve.
As of Sept. 28, the top five short-duration funds had raised nearly $5 billion in the last five days. When it comes to short-term yield curves, China and Japan are likely to be big sellers of U.S. Treasuries as they strengthen their currencies.
Last month’s Treasury meltdown saw 10-year nominal yields surpass 4% in the Asian session, a good indicator that reserve managers are aggressively selling Treasuries. . Japan was likely selling because the Bank of Japan has more free cash. But that’s just a snapshot of the colors in the market these days. Let’s take a step back and see what happened in the last few months.
Over the past few months, the duration of asset and model portfolios has returned as the UST curve has flattened. This same group also sells energy-focused inflation-protected ETFs. Ultimately, this type of investor believes interest rates have peaked and is selling his TIPS in favor of nominal yield. We believe this trend is likely to continue.
Conclusion
The colors above are just a snapshot of the flow, as the market is still bubbly. As market conditions change, so do investor beliefs and trends.
David Graichen, Head of Capital Markets
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Editor’s note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.
