Head of Fixed Income Strategy
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.
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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.
