Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
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The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
Monthly Fixed Income Chart Pack
Althea Spinozzi
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.
US Treasuries
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 corporate bonds
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.
European government bond market
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%.
Euro Bund on the weekly chart has formed what looks like a Doji Morning Star which indicate a bottom and reversal. Ideally the body of the Doji should gap below the bodies of the previous and the subsequent candles which is doesn’t do in this case. Nevertheless, the Doji shadows bounced off the 200 Weekly SMA and back above the support at around 169.12. A move above 170.40 could pull a few stops and confirm a bullish break out of the channel taking the Bund to 171-171.63 which are 0.618 and 0.764 retracements respectively, of the falling channel. Failing to do break above 170.40 and instead dropping below 168.49 could lead to a re-test of May low. (Courtesy of Kim Cramer)
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.
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