Real rates are firmly positive. This may affect capital allocation
The US10 year treasury hit 3.01% yesterday and is currently yielding 3%. However, besides paying attention to this psychological level, the rate the yield has appreciated over the last eight weeks is noteworthy. This rapidness means the cost of borrowing has jumped markedly, giving very little time for gradual adjustment.
Moreover, real rates are now firmly positive since the beginning of the pandemic period. The positive rates, in turn, impact the rate of return across the risk spectrum. I.e. when real rates were negative, market participants reallocated capital to areas with a positive return, despite the heightened risk. However, this may no longer be the case because investors have less incentive to assume risk. Moreover, this exacerbates as the Fed looks to catch up to the market aggressively. Tomorrow a 50bps hike is priced, and the central bank will announce its plans to normalise its balance sheet.
The required rate of return for risky assets is adjusting and appreciating upwards. This shaping is likely to put pressure on the value of these assets. Moreover, it will continue until a point that looks attractive once again to investors. This rebalancing makes the current outlook uncertain, which translates into higher risk.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.