Author Archive

US-China trade update

Trade tensions between the US and China have risen sharply but we believe the situation would need to escalate much further before China resorts to the extreme weapons of currency devaluation and/or selling down its US Treasuries. The fundamental reason for this argument is that such strategies do not serve China’s own interests. On the […]

Core sovereign bond yields – update

Taking hold of two important changes to our central macroeconomic scenarios, we are adjusting downward our year-end target for the 10-year US Treasury yield from 3.0% to 2.8% and the Bund yield from 0.5% to 0.3%. The drivers behind this include lower inflation expectations, rising US-China trade tensions against a constant monetary policy backdrop. Four consecutive […]

US and euro investment-grade credits: similar, but different

US and euro investment grade (IG) indices have posted solid returns year-to-date thanks to a rally in credit spreads and sovereign yields linked to the dovish turn taken by some large central banks. We have turned neutral from underweight on euro IG credit, while retaining our underweight stance on US IG credit. First, euro IG […]

STAYING NEUTRAL ON US TREASURIES

Since our December note on the 2019 outlook for US Treasuries, the environment for US bonds has shifted dramatically. The 10-year US Treasury yield reached a low of 2.56% on 3 January, the day before Jay Powell, chairman of the US Federal Reserve (Fed), made a U-turn from a hawkish to a dovish stance. Taking […]

Euro credit: 2019 outlook

Last year was a difficult one for euro credit, with both the ICE Bank of America Merrill Lynch (ICE BofAML) investment grade (IG) and high yield (HY) indices posting negative total returns. This was entirely due to wider credit spreads, as medium-term German government bonds yields fell slightly. Looking back, policy makers had a major […]

Core euro sovereign bonds 2019 outlook

In our central scenario, we expect the 10-year Bund yield to rise gradually to 0.8% by the end of next year from 0.26% on 17 December. Underpinning this upward movement is our expectation of a cumulative deposit rate hike of 40 basis points (bps) by the ECB, against current market expectations of only 10 bps. […]

2019 US credit outlook

While the US economy continues to grow, knowledge that we are late in the cycle means we are closely watching two developments of significance to credit markets: US corporate leverage and US Federal Reserve (Fed) rate hikes. Many indicators are pointing to rising leverage among US companies, be it the non-financial corporate debt-to-GDP ratio (which […]

Time to be more constructive on high yield

We have just moved from an underweight to a neutral position on US and euro high yield bonds. Several factors underpin this relatively more constructive view. First, in spite of historically low spreads, the carry offered by high yield remains attractive and acts as a cushion at a time of rising government yields. Second, fundamentals […]

EM storm is subsiding, but clouds remain

In a Flash Note in May, we argued that the rise in yields of emerging market (EM) debt could offer compelling opportunities for investors who had the patience to ride out the storm. EM credit spreads and yields have indeed recently being shown some signs of stabilising after a period of rising yields. The faltering […]

US high yield is looking suspect

US high yield (HY) is one of the few segments in the fixed income space that has posted a positive total return since the beginning of the year. Thanks to lower duration, US HY has so far suffered less from the surge in US Treasury yields than its investment-grade counterpart. Moreover, some index-heavy sectors have […]

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