I – Global information and fundamental analysis about GOV Bond
An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index. In this report, we’ll focus on the governement’s bond. Bonds are more difficult to buy individually than shares because they are traded overthe-counter (OTC), whereas shares are traded on the stock exchange. To meet the many challenges of the bond market (liquidity, variety of available bonds, etc.), investors can choose bond ETFs to obtain efficient exposure to a large and liquid bond universe in a single transaction.

We notice yield have fell during this period, it is not longer advantageous to have bond if you seek return. The causes are the intervention of the different central bank in the world who drive the yield now.

Even if we don’t seek to maximize return with bond, we can try to have the best risk return and diversify portfolio. We can see below : a portfolio with 60% of S&P 500 and 40 % of bond only loose 8,62 % instead of 17,30% if the portfolio have only stocks during the period from february to march 2020 (COVID 19).

Since the beginning of February, operators have started to take an increasing interest in state debts, In fact, Joe Biden’s recovery plan has some experts fearing of overheating and a too abrupt recovery that would result in higher inflation and higher government borrowing rates. Many economists predict a big rise in interest rates, particularly in the United States, in 2021. This would be combined with a drop in asset purchases by the FED, which could force market operators to arbitrate the equity market in favour of other types of assets. We could see below the rise of the 10 years US and FR for last years. Both bonds saw their yields increase to their highest levels in the last year (US) and 7 months (FR) respectively.

This rate increase is combined with increases in the inflation forecast. Indeed, the economic recovery will lead to higher wages and higher prices for goods and services, particularly energy. This is accentuated by the various stimulus plans, particularly with the rumour of an « infrastructure » recovery plan in the United States. For the time being, the inflation target of around 2% posted by the European and American central banks still seems far away. In the United States, price rises accelerated to +0.4% in December over one month but only reached +1.3% over the year, while in the euro zone, it became positive again in January after five negative months, at +0.9% over the year. It is « unlikely » that inflation is established in a sustainable manner above the target of 2% annual target set by the Fed, said Friday the chief economist of the International Monetary Fund (IMF), Gita Gopinath. The rapid rise in rates suggests the same scenario as in 2013. At that time, the rise in interest rates had caused a fall in the equity and commodity markets and a widening of the spread between corporate and government debt.

To conclude this part, let us not forget that rates are dependent on the action of central banks. Even if inflation were to be present, which is very difficult given that for the moment only certain price categories are increasing, central banks would not stop their asset purchase programme, i.e. their rate control programme, as recently confirmed by the US Federal Bank even if they will not pilot the long term yield for now.


II – ETF Analysis

A : Lyxor PEA Obligations d’État Euro UCITS ETF – Acc
For the first one, I choose one focus on EuroZone Bond. This fund try to replicate the following benchmark : MTS Mid Price InvG Ex-CNO Etrix All Maturity (EUR). It measures the performance of the most representative and most liquid government
bonds in the Euro zone.

We notice here that the duration gap is negative because the maturity is greater than the duration, so coupon reinvestment risk dominates price risk. The investor’s risk is to lower interest rates. In the case of a potential climb of rates, this could be a good opportunity.

We can see that there is an upward trend in the medium term, supported by a slant. The bet here is to go for the historical highs hoping for a rise in rates in order to benefit from the reinvestment of the coupons.


B : Vanguard Extended Duration Treasury ETF
For this second product, we are interested in a fund that can benefit from variations in US interest rates. Here are its main characteristics :
• Seeks to track the performance of the Bloomberg Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index.
• Passively managed using index sampling.
• Broad exposure to the long-term Treasury STRIPS market.
• Provides current income with high credit quality.

This ETF is more risky than the other, we seek high and steady revenue as we see in the past performance. The risk here is a climb of interest rate because of the duration arbitrage made by portfolio manager. Have a look now at the technical analysis.

As we see, the risk is a climb of the rate of US Bond/Treasury Yield. On 04 March, the federal bank in of America said there will not do anything for now to contest the climb of the long term yield. So, maybe we can try to enter in this fund at the crossover of the oblique bullish medium-term.


III – Conclusion

In conclusion, rising rates are a concern for markets as an episode such as 2013 may be on the agenda. However, in spite of the FED’s speech of March 4th, it seems difficult to envisage the end of the asset purchase programme by central banks in general and an increase in interest rates. It is therefore unlikely, in my view, to return to high rates in the short term. Finally, despite the sharp rise in February, interest rates have not returned to last year’s levels, leaving room for panic. Finally, inflation expectations are clearly down this week. This can be explained by the fact that the latter is cyclical and not structural. Indeed, the price of bearers in China is rising, but consumption is still on the rise, as is the rise in wages and raw materials, especially with the latest OPEC discussions.

Written on 25/07/2021



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