Mackenzie Minute: June 1, 2018
Andrea Hallett, Portfolio Manager, Mackenzie Asset Allocation Team, discusses volatility in global bond yields due to turmoil in European markets and other short-term market moves.
Andrea Hallett: We’ve seen volatility return to markets. We are seeing this both on the equity side and on the bond side. In terms of fixed income, volatility has come back to yields globally. The US Treasury yield started the year at 2.4, that’s the 10-year yield. We then saw increase all the way up to 3.1 percent, that’s almost a 7-year high, but then it retreated quickly after that. And that was really driven by turmoil within European markets.
In North America, both Canada and the US are currently on this gradual tightening path in terms of interest rates. That’s really the market view, and there is a few things that could really throw a wrench in it. First, within Europe, right now, there could be a sudden Italian vote. That could really lead to contagion across the European continent. There’s also the US/China trade relations. There’s been a lot of volatility here both in terms of policy and in terms of political rhetoric surrounding that. Finally, there’s the NAFTA negotiations. Where the NAFTA agreement ends up in terms of those negotiations could have a big impact on where the Bank of Canada’s policy ends up.
In the Symmetry portfolios we use a risk-budgeting approach. And really our objective in this risk-budgeting approach is to have a number of different views in the portfolios. Our tactical allocation is one of the things we are allocating a portion of that risk budget to. Now at the end of 2017, we had a change in our views on the fixed income side. We moved from a neutral view on fixed income to an underweight view on fixed income. This was driven by negative readings from our valuation models, our sentiment models, as well as our business cycle models. But overall, we expect the Symmetry portfolios to be resilient to these short-term moves in the market.