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Bonds – Great Opportunity or bubble is bursting?

In recent months, bonds, mostly outside the EU, have experienced a relatively steep drop. We are talking about bonds with long-term maturities of ten, twenty years, and more. Longer-dated bonds may be relatively more volatile but may have interesting yield potential. In recent months, we have seen a slight decline in longer-term maturities.

At the beginning of 2021, the ECB indirectly indicated that it closely monitored the growth of bond yields and subsequently decided to intervene in a similar way to purchase longer-term bonds to reduce the yield curve and corporate investment and interest in lending to continue. We can see the opposite situation in the USA, where cheap money and fiscal stimuli are also flowing, but here we can see a split in the US central bank's monetary policy. Fed said that at the current level of government bond yields, they are not worried , which indicated that they are not currently planning to buy larger bonds with higher maturities. We assume that if US government bond yields hit levels of about 1.8 percent or more, then the US Federal Reserve would follow a similar path.

Opportunity to buy or threaten a bigger slump?

In the next chart, we can see the different price development of ETFs between US government bonds with a maturity of 20 years and euro area government bonds with a maturity of 25 years or more. In recent weeks, however, we can see a slump in both assets. However, volatility varies, and so does the level of decline—some talk about "cleaning the market" and bursting the bond bubble. However, we still consider it a correction. However, it is interesting to monitor the long-term trend of individual ETFs and their volatility. While the ETF for euro area government bonds has been improving in the long run, we can confirm this by the slump. ETFs in the euro area have fallen by around 10-11% since their peak, while ETFs in the US with slightly lower maturities have fallen by almost 22% since their peak. These corrections can be a perfect opportunity.

EU and US bond price with long term maturity Source: Tradingview

Seasonality or what does history tell us?

Although bonds are not subject to a certain seasonality, which can cause extreme shocks in demand and supply, we still put historically strong months into context. According to Guggenheim Investments, the best months for 10-year bonds are ahead of us. These are the months: April, May, June, July, and August, where historically, according to the median, yields fall the most (yield falls -> the price of a bond rises). According to the data below, the month is very strong in June, and yields tend to decrease statistically. Both the interquartile range and the median speak of it. Nowhere is it written that history will repeat itself, but this is a statistic.

Most bullish months for US bonds. Souce: Guggenheim Investments.

WALFIR Technologies is one of the three divisions of WALFIR s.r.o., which is based in Slovakia. The primary interests of this division are analytical, quantitative, and algorithmic...


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