Senior Fixed Income Strategist
Summary: US corporate bond primary market stops, Zambia defaults on its Eurobond debt, and Argentina's recently restructured dollar bonds fall in the distressed territory. How more bad news does the bond market need to receive to understand the music is stopping?
US corporate bond primary market stops, Zambia defaults on its Eurobond debt, and Argentina's recently restructured dollar bonds fall in the distressed territory. How many bad news does the bond market need to receive to understand the music is stopping?
US corporate bonds had a very tough day yesterday amid the selloff in the equity market. For the first time since March, the US primary market didn't issue any investment-grade nor high-yield corporate bonds. High yield corporates are the ones to have accounted for most of the losses with the CDX North America High yield Spreads wider by 30bps.
We have seen the US Yield curve flattening slightly, however as we have explained in yesterday's article, we don't believe that the yield curve is a reliable indicator of distress at the moment as the Fed heavily controls it in an effort to kill market uncertainty.
We believe that volatility in the corporate space will continue to be high, and we might see more disruption in the primary bond market. Within this context, investors need to pay attention to fallen-angels risk in their portfolio. We believe that interest coverage deterioration and reduced financial flexibility will soon translate into numerous downgrades.
The worst news comes from emerging markets. Argentina's new dollar bond fell yesterday to a level of 39 cents on the dollar as the government tightens currency controls to protect waning international reserves. This morning we have seen the Philippines rejecting all bids for its 10-year treasury bonds as investors were demanding more yield than previous auctions. The Philippines, just a few days ago, have also rejected all bids on new bills. Finally this afternoon we received news that Zambia is going to default on its Eurobonds.
We don't believe these events are idiosyncratic; it is evident that the market is becoming more nervous about risk. This is why we think this is a perfect time to take profit and reassess risk as the storm is coming.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
