According to Skandia Investment Group (SIG), rising bond yields in the US are an indication of risk appetite returning to the market.
SIG portfolio manager, Anthony Gillham, said the yield on US government bonds has moved out to nearly 0.5% on the 10-year point on the curve, which is 0.1% higher than UK Gilts. Gillham added: “This might not sound much, but this difference, or basis, has shifted significantly over the past few weeks meaning that UK Gilts now yield less than “ultra safe” US government bonds.”
Gillham went on: “Bond yields moving higher are often correlated with improving economic data, which is what we have observed in the US. That gilts have outperformed US Treasuries further supports the perceptions about the relative state of the two economies.” He said that past performance showed that the UK/US government bond spread is a proxy for risk, and that investors could be dumping negative real yields on government bonds in favour of credit and equity assets carrying more risk. He concluded: “While there are a number of negatives floating around such as the US fiscal cliff, with the macro data picking up, and the European situation holding together as markets smell a plan, the environment for risk is looking somewhat brighter than it did a few short months ago”.