In Short: We believe the bias on yields is still up


While the past few days’ steep sell-off in the equity markets and surge in volatility reversed part of the recent run-up in yields, we believe the bias remains upward and thus are remaining short on our duration call for fixed-income products. Federated’s duration committee believes these recent stark market moves are the result of an equity valuation correction exacerbated by the reversal of crowded trades/strategies predicated on previously low volatility. On the other hand, the underlying, persistent dynamic of strong U.S. and global growth, expansionary fiscal policy, normalizing monetary policy and a moderate increase in inflation pressures all remain likely to support an upward trajectory in Treasury yields from current levels. That said, a variety of factors—including March’s looming debt-ceiling deadline and the prospect that the backup in bond yields is somewhat self-limiting given the response of stock markets—urge caution on getting too short and could mute the degree of upward yield movement from here. We’ll keep you posted.