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Daily Archives: 19th September 2018

19th September 2018

Fixed income feels the chill

MARKET CLOSE:
iTraxx Main

60bp, +0.4bp

iTraxx X-Over

280.2bp, +0.4bp

🇩🇪 10 Yr Bund

0.48%, unchanged

iBoxx Corp IG

B+130.3bp, -1bp

iBoxx Corp HY

B+380bp, -3bp

🇺🇸 10 Yr US T-Bond

3.07%, +2bp

🇬🇧 FTSE 100

6026.94, ERROR
🇩🇪 DAX

12591.68, ERROR
🇺🇸 S&P 500

3349.16, -4.38

Rates are the story…

The only market bursting out of the blocks is the rates one, that is, with yields heading higher and close to setting the highs for the year in the US (10-year), while the 10-year Bund yield up at close to 0.50% is still 27bp short of its highest level for 2018. The direction of travel for both markets at the moment is the same – higher in yield terms. There might be trouble ahead for emerging market borrowers as higher rates feed into higher refinancing costs against a more difficult economic backdrop once those higher tariffs start to bite.

So a more hawkish policy by the Fed is now feeding into rates and everything is being dragged higher with rising US Treasury yields. Ten year Gilt yields were up at 1.61% (+4bp) and are just 4bp shy of the previous high for 2018. The more conciliatory words from the EU about a deal on Brexit of late may have helped market confidence in the UK, too (reduced the bid for safe-haven Gilts), although UK equities have failed to get much of a boost (up by around 0.4% in the session).

We still think that Bund yields are most unlikely to get too much past 0.60% this year in the 10-year (0.48%, unchanged), while US Treasury yields are unlikely going to see much higher than 3.25% before the year is out (now 3.07%, +2bp). There are still many uncertainties on the geopolitical/economic front still, and they ought to cap how far the sell-off in government bonds might go.

For sure, rate market total returns this year are going to be negative (in the -0.5% to -2% area for Eurozone govvies), while credit returns are also going to be affected by any weakness in rates – likely keeping IG and HY credit in the 0% to -1% area (euro denominated markets).

Sterling credit total returns are going to fare much worse given the longer duration of the market and that relatively more aggressive sell-off in the Gilt market. Total returns exceeding -2% to -3% are quite possible – they’re already -1.9% YTD.

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