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Asset performance under yield spikes

There has been 11 periods of  reasonably rapid 1% yield movements in US 10 year bonds over the last two decades, with the median yield increase 114 basis points (bps) occurring over seven months. The following table shows the median and worst performance of investible assets in these instances.

Source: AMP Capital

  • As expected, cash is the best performing income asset class, with bonds generally producing negative returns.
  • Global, emerging market and Australasian share prices rose in nearly all instances (often after a wobble at first). This can be explained by higher yields responding to higher growth which is typically positive for equities.
  • Higher dividend assets (property, infrastructure, domestic shares) have generally underperformed global shares and have produced negative returns on some occasions.  These assets should be more susceptible to yield-sensitive investors.
  • Commodities generally rise when yields have risen by more than 1%. Like equities, commodities are positively correlated to growth but typically react later in the cycle. There are some negative commodity returns during yield spikes which can be rationalised if higher interest rates are expected to lower future commodity demand.
  • The New Zealand dollar (NZD) generally gains against the US dollar (USD) in a rising US yield environment which again can be explained by the NZD being perceived as ‘global growth’ currency. However, the NZD typically declines against the Australian dollar (AUD) which probably reflects AUD’s greater exposure (higher beta) to the commodity cycle. 
We think this guide is as good as any as to how things could pan out, but it must be noted this sample does not include exits from extended periods of zero rates and quantitative easing (QE) so caution is warranted. If the Fed decided to hike rates in a weak growth environment, say for financial stability reasons, the outcome could be quite different.
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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