Two years is a long time in the world of US interest rates trading. Back in mid-2016, the federal funds rate had nudged up to 0.25%, but the hunt for yield remained all-consuming for investors needing to satisfy return obligations to their end clients. Fast-forward to today, and the US Federal Reserve (the Fed) is in a rate hike cycle, while yields on the benchmark 10-year treasury note have broken through the 3% barrier – often viewed as signalling the end of the bull bond market – no fewer than five times since late April.
This has created a new paradigm for interest rates trading. “We have moved from a low-rate environment and low volatility, which triggered yield enhancement strategies and appetite for more risky assets, to a world of rising yields, which means a bigger focus on asset valuations and on hedging strategies,” says Jérôme Sabah, global head of rates, credit and foreign exchange sales for financial institutions at Société Générale Corporate & Investment Banking (SG CIB). To fully assess the ramifications for trading, however, it is first necessary to identify what has caused yields to increase, as well as their interaction with the equity markets.
