![]() These scenarios, however, are not meant to cover most of the outcomes. A bull steepening scenario will get us back to the bull market we experienced in previous years if the economy were to stumble again due to the continued spread of the delta Covid variant or other factors. This quick turnaround impacted some of the hedge funds, with a large macro fund suffering significant losses.Ī bear flattening scenario would become more likely if the economic forecasts become rosy and the Fed decides to embark on a belt-tightening program sooner. ![]() As noted earlier, this was followed by a bull flattening scenario that the market digested for a couple of months, with different bond sectors gaining favor. A bear steepening scenario was what we experienced early this year and we list some of the sectors that should perform well in that environment. The table below summarizes four major curve twists and the likely associated economic backdrop and Fed stance. While it may be daunting to manage various possible yield curve fluctuations, it is helpful to analyze the key drivers of returns across a representative set of scenarios. ![]() The confluence of factors that drive changes in the yield curve's level and shape have often blindsided portfolio managers as the markets respond quickly to changing fundamentals, interpretation of Fed-speak, and technical forces. The bear market steepening from earlier this year made a quick U-turn as uncertainty related to the strength of the economic recovery and possible early withdrawal of Fed-induced liquidity worried investors. The bond market has been buffeted by dramatic shifts in the shape of the yield curve in recent months.
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