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Yields on U.S. Treasuries have been rising recently, triggering a sharp selloff in equity markets. Anthony Okolie speaks with Scott Colbourne, Managing Director, TD Asset Management, about what the latest volatility means for your investment portfolio.
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- Markets have been very volatile this week, especially the NASDAQ after rising bond yields have spooked investors into selling risk assets. Scott, what happened?
- Hi, Anthony. The bond market is certainly in focus these days. So what we saw yesterday in the markets is the US 10-year touched 1.6%.
So I just take you back to 2020 midyear in August. US 10-year rates got as low as 0.5%. Through 2020, they gradually increased. But this year, year to date, interest rates in the US and Canada, globally, have moved up quickly. So we went from about 0.9% at the end of last year to touching, as I said, 1.6% yesterday.
- And why is this happening?
- Well, it's a good-news story because we've had tremendous advancements on public health. Vaccinations are up globally. We've had tremendous amount of fiscal stimulus. So this is $900 billion at the end of last year in the US, and now we're talking about $1.5 to $1.9 trillion of stimulus soon. So all that combines together with a great economic recovery. So we may even see the US grow as much as 10% in the second quarter. So this is all in reaction to a very good-news story.
- And so why should investors care about 10-year yields?
- Ultimately, the bond market has an impact on all other asset classes. So you led with we've seen risky assets in the NASDAQ selling off a bit. So equities are impacted as bond yields go up. Certainly the FX market has an implication on growth currencies like the Canadian dollar and Aussie dollar. It spills over to commodities. So it obviously has an impact across all your asset classes, and that's why all investors should be paying attention to what signals are coming from the bond market.
- So what should investors be paying attention to or watching going forward?
- Well, I think, as I said, it's a good-news story. So if we continue to see rates gradually move up in response to economic growth and improvement on the vaccination front, that's OK. We expect that. But what we do concern ourselves with is a rapid adjustment. We saw a quick adjustment in the last two weeks in interest rates. If we continue to see that rapid adjustment, what it has an implication for is financial stability, and we would expect some commentary from central banks, perhaps even some thinking about potential action. So it's the rate of change of a change in interest rates that ultimately has an impact on financial stability.
- So what does all of this mean for your portfolio?
- At the Wealth Asset Allocation Committee, we continue to have an underweight in fixed income. So broadly as one would expect this year, fixed income is underperforming, and we should continue to sort of underweight fixed income as interest rates normalize and then growth continues to develop.
We have to be also mindful that despite this big sell-off, equities, broadly speaking, are still up year to date. Canadian equities are up 5%. US equities are up a couple percent. Credit remains very stable. So broadly speaking, the markets are responding to this adjustment in interest rates. And as always, continue to build a diversified portfolio and consult with your financial professional as you build that portfolio going for it.
- Scott, thank you very much for joining us today.
- Thanks, Anthony.
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- Hi, Anthony. The bond market is certainly in focus these days. So what we saw yesterday in the markets is the US 10-year touched 1.6%.
So I just take you back to 2020 midyear in August. US 10-year rates got as low as 0.5%. Through 2020, they gradually increased. But this year, year to date, interest rates in the US and Canada, globally, have moved up quickly. So we went from about 0.9% at the end of last year to touching, as I said, 1.6% yesterday.
- And why is this happening?
- Well, it's a good-news story because we've had tremendous advancements on public health. Vaccinations are up globally. We've had tremendous amount of fiscal stimulus. So this is $900 billion at the end of last year in the US, and now we're talking about $1.5 to $1.9 trillion of stimulus soon. So all that combines together with a great economic recovery. So we may even see the US grow as much as 10% in the second quarter. So this is all in reaction to a very good-news story.
- And so why should investors care about 10-year yields?
- Ultimately, the bond market has an impact on all other asset classes. So you led with we've seen risky assets in the NASDAQ selling off a bit. So equities are impacted as bond yields go up. Certainly the FX market has an implication on growth currencies like the Canadian dollar and Aussie dollar. It spills over to commodities. So it obviously has an impact across all your asset classes, and that's why all investors should be paying attention to what signals are coming from the bond market.
- So what should investors be paying attention to or watching going forward?
- Well, I think, as I said, it's a good-news story. So if we continue to see rates gradually move up in response to economic growth and improvement on the vaccination front, that's OK. We expect that. But what we do concern ourselves with is a rapid adjustment. We saw a quick adjustment in the last two weeks in interest rates. If we continue to see that rapid adjustment, what it has an implication for is financial stability, and we would expect some commentary from central banks, perhaps even some thinking about potential action. So it's the rate of change of a change in interest rates that ultimately has an impact on financial stability.
- So what does all of this mean for your portfolio?
- At the Wealth Asset Allocation Committee, we continue to have an underweight in fixed income. So broadly as one would expect this year, fixed income is underperforming, and we should continue to sort of underweight fixed income as interest rates normalize and then growth continues to develop.
We have to be also mindful that despite this big sell-off, equities, broadly speaking, are still up year to date. Canadian equities are up 5%. US equities are up a couple percent. Credit remains very stable. So broadly speaking, the markets are responding to this adjustment in interest rates. And as always, continue to build a diversified portfolio and consult with your financial professional as you build that portfolio going for it.
- Scott, thank you very much for joining us today.
- Thanks, Anthony.
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