Yield Rise "Blessing in Disguise" To Some, Nomura Says

While many begrudge the rise in interest rates and their concomittant tightening of financial conditions, Nomura's George Concalves notes that the move has been a "blessing in disguise" for most long-only bond investors. Insurance companies and pension-funds, who need 'yield' to cover long-term liabilities, have been underweight since the Fed began Operation Twist (on the basis of the yield became too compressed) but the recent sell-off in Treasuries (which does not reflect any asset-allocation or great rotation since stocks have been just as weak) enabled these funds to put money to work. This helps to explain the very notable flattening in the yield curve (5s30s -17bps in the last week) as duration extension is more economically attractive. Concalves suggests Taper fears are overdone and that should rates back up another 25bps, there is more dry-powder to put to work in bonds.



The other supposed benficiary of higher rates - if one believes the mainstream pumpers - are the banks via increased NIM. However, as Concalves notes, this may very well not be the case since too-big-to-fail banks are hamstrung by "burdensome regulation", face significant Mark-to-market losses on their bond holdings, and will see low loan demand (since the housing market, at least, is likely to remain very slow - as we saw today - given mortgage rates, absence of meaningful growth in real income and the low quality of recently created jobs.)

Finally, Concalves notes,

"more than half of the accounts we visited are more fearful that the Fed triggers a policy error (or might have already) by not being able to communicate effectively differences regarding tapering versus forward guidance."

Chart: Bloomberg


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