From risk to opportunity

Investors in recent years may have fallen victim to the tranquilising effect of central bank policy and their ability to evaluate and judge risk. Some thought that central bank policy had put an anchor on bond yields and that long-risk was a sure thing. However, the second sharp back up of bond yields in two years is now testing the resolve of these investors who have piled into expensive risk and riskless assets at the wrong stage of the cycle. However, there are limits to how far bond yields can back-up considering the weak economic environment, sustained low inflation, a lack of de-leveraging in global balance sheets over the past seven years and continued QE programs in Europe and Japan. This may be why corporate securities have to date held up well against the sell-off in government instruments. If this trend continues for a few more sessions, there may be many forced sellers and that is when securities can go from a risk to an opportunity.