Haven Assets Slumping Is Actually Worst Risk-Off Sign of All

Remember the days when a selloff in Treasuries was considered a sign of positive news?

No longer. The U.S. 10-year yield jumped by the most in 11 months on Thursday, while the Swiss franc and yen were among the worst-performing Group-of-10 currencies for the week and gold slumped for a fourth day. All havens, right? But these moves were seen as a signal of fear in markets.

Haven Assets Slumping Is Actually Worst Risk-Off Sign of All

The upending of conventional wisdom is a result of the current environment of record monetary accommodation. Investors are becoming concerned that economic-recovery signs will spur the Federal Reserve and other major peers to withdraw stimulus, turning off the spigots that have fueled the rally in financial markets since the middle of last year. In other words, if the economy looks “too good,” it’s bad news for risk assets.

“The Fed leadership holds some responsibility for this,” according to Evercore ISI strategist Krishna Guha and economist Ernie Tedeschi. “The absence of any indication of concern or -- more appropriately in our view -- central bankerly carefulness around the move in yields from Williams, Powell, Clarida and Brainard in recent days has been read in markets as a green light to ramp real yields higher.”

A key source of concern is not simply the direction of the yield moves -- but the speed. While real yields are still low by historical standards they have been moving fast, creating a sense of disorder, Guha and Tedeschi wrote in a note.

‘Rapid Advance’

”The problem is the pace,” said Min Gyeong-won, an economist at Woori Bank in Seoul. “Normally a rally in yields would mean risk-off, but this time the rapid advance combined with the lack of confidence in the Federal Reserve to hold that off has spurred risk appetite, causing a massive blow to Asian emerging currencies.”

Haven Assets Slumping Is Actually Worst Risk-Off Sign of All

The absence of any response from Fed officials, at least until now, is adding to investor unease.

“So far there has been very little push back from the Fed in terms of rising yields because the Fed thinks that rising yields are a reflection of the better outlook,” said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd. “We could be at a tipping point where the rise in yields could become more problematic for the broader market.”

Haven or risk asset, safe or not, investors may need to be prepared for more turbulence ahead.

“This is a potentially painful reassessment of that long positioning that has been sparked by the rise in government bond yields, which is creating a self-perpetuating negative feedback loop,” said Jeffrey Halley, a senior market analyst at Oanda Asia Pacific Pte in Singapore. “Or as I call it, a welcome return to two-way price action.”

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.