Head of Fixed Income Strategy
Summary: Nominal US Treasury yields bite the Federal Reserve's message that interest rates will be "lower for longer". Yet, breakeven rates indicate expectations of tapering ahead. The Investment Grade (IG) US corporate bonds OAS has tightened to the lowest level since 2007. Ten-year Bund yields look consolidating in a tight range between -0.20% and -0.15%. The spread between BTPS/Bunds is tightening and will find support around 100bps.
10-year US Treasury yields are trading in a tight trade range between 1.50% and 1.70% within their decennial descending trend channel.
The reaction of 10-year US Treasury yield to the surprise in PCE index on Friday was muted. The bond market is now waiting for this week’s job numbers. If nonfarm payrolls surprise on the upside, the reflation trade may be revived. If they disappoint we might be talking about stagflation. Either way, the focus on bonds will be on the inflationary pressures as we approach a peak in summer.
Then the 10 year US T-Note rolled contract from June to September it broke below its short term rising trend line in what appears to be a rising wedge like formation. Currently it is trading a few pips above the 131 18/32 support. A close below would confirm the bear trend has resumed for at test of the April low at around 130 25/32. If the T-Note rebounds from here “jumping” back in to the Wedge the resistance around 133 could be tested. (Courtesy of Kim Cramer)
Inflation expectations hedged lower from their highs as the latest FOMC minutes showed members are willing to discuss tapering during the next meeting. However, nominal yields remain stable, buying into the Fed’s message that interest rates will stay “lower for longer”.
Quarterly outflows of TLT ETF (iShares 20+ Year Treasury Bond ETF) continues to increase showing that investors are actively cutting on duration.
US investment-grade corporate bonds are the most expensive they have been in fourteen years paying only 83 basis points over US Treasuries.
The spread between HY and IG corporate bonds OAS widened slightly this month, driven by a tighter OAS in the IG corporate bond space, while HY corporate bond OAS remains stable. Yet, the HY/IG spread still remains one of the tightest we have seen in the past fifteen years. Right now, HY US corporate bonds pay 217 basis points over their IG peers.
Bund yields seem consolidating in a tight range between -0.20% and -0.15%. If they break below the support line at -0.20% they will find support at -0.40%. However, if they break above -0.15% they will enter a fast area where they will find resistance at 0%.
Although Italian BTPS are now offering a small pick up over Greek government bonds it’s interesting to note that their spread is roughly where it was pre- global financial crisis.
The spread between Italian BTPS and Bund is tightening and will find support around 100 basis points.
Italy is now the only European sovereign paying above EUR-hedged 10-year US Treasuries.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
