Endangered Species: Yield or reach for yield? – TDS

Analysts at TDS believe that “reach for yield” will be challenged particularly when it comes to duration risk early in 2017,  driven by fears of higher U.S. deficits, higher inflation risk premiums and faster reduction in central bank accommodation.  

Key Quotes

“However, markets are repricing fast and we discuss signs to watch for to fades these moves. A significant rise in real rates or the USD can become self-limiting. Meanwhile negative deposit rates keep demand high for yield, but for now credit should benefit more since it is not subject to significant supply increases. We also think that the extent of FX hedging by Japanese lifers will decline once USDJPY finds a base, and that will bring support for Treasuries at some point.” 

“Market: We own core SSA/agency and credit product against Treasuries, Australian semis vs ACGBs, JGBs hedged with FX basis and silver against gold.”