Fixed Income   |   Jan 16, 2020

The Tail Wagging the Panda

Since the beginning of the trade war between the United States and China, we’ve seen a rising correlation between U.S. Treasury yields and the Chinese Yuan. This isn’t all that surprising: as the conflict escalated and Washington struck a harder stance, the People’s Bank of China depreciated its currency in order to stimulate exports and the country’s economy. At the same time, investors fearing an economic downturn crowded into safe-haven assets such as US Treasuries, sending yields down.

Jean-Guy Mérette
Vice President and Portfolio Manager, Fixed Income

With the phase 1 agreement officially on paper, the Chinese Yuan has returned to the level it was before the trade war hit its culmination point in August – on January 15th, the PBOC set the currency at 6.8845 USD/CNY (0.14525 CNY/USD), its strongest since the end of July last year. Yet the U.S. 10-year rate has only shown a mild upward trend in the past couple months, as investors are still pricing in an 85% chance of at least one cut by the Fed by the end of 2020. We’re not saying that there’s a causal relationship between the Yuan and U.S. Treasury rates – or that the tail should be wagging the proverbial panda – but, we believe that bond investors haven’t demonstrated enough optimism regarding the trade accord so far, and, hence, that interest rates in the U.S. are still too low.  

Jean-Guy Mérette

Vice President and Portfolio Manager
Active and Strategic Fixed Income Team

Disclosures

Related Insights

Market Comment
Sep 30, 2020

Global Financial Forecast 2020-2025

Read our latest Global Financial Forecast to learn more on what to expect from the markets in the next 5 years.
Candice Bangsund
Vice President and Portfolio Manager, Global Asset Allocation
Fixed Income
Sep 21, 2020
5:59

Favouring high credit quality within high yield

Jane-Marie Rocca, Portfolio Manager, Fixed Income talks about high yield bonds and why she favours higher credit quality issuers within the asset class in the current market environment.
Jane-Marie Rocca
Portfolio Specialist, Fixed Income
Fixed Income
Sep 14, 2020
9:48

Active and Strategic Fixed Income Team – Strategy Update

Jean-Guy Mérette, Vice President and Portfolio Manager, Active and Strategic Fixed Income Team, talks about his results for the first half of 2020 and his positioning and outlook for the remaining of the year.
Jean-Guy Mérette
Vice President and Portfolio Manager, Fixed Income
Fixed Income
Jul 16, 2020

Don’t Fight the Fed

Humble fund managers must accept the need to choose one's battle, and to know when they're outmatched.
Jean-Guy Mérette
Vice President and Portfolio Manager, Fixed Income