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Daily Archives: 1st September 2019

1st September 2019

Stick or twist?

MARKET CLOSE:
iTraxx Main

48.8bp, +0.7bp

iTraxx X-Over

253bp, +0.7bp

🇩🇪 10 Yr Bund

-0.71%

iBoxx Corp IG

B+120.8bp, +0.7bp

iBoxx Corp HY

B+425bp, -1bp

🇺🇸 10 Yr US T-Bond

1.50%

🇬🇧 FTSE 100

7167.95, (-0.61%)
🇩🇪 DAX

12670.11, (+0.32%)
🇺🇸 S&P 500

2989.69, (-0.21%)

Politics and trade war whip up the perfect storm…

Much of it doesn’t make sense, but on we go – and into uncharted territory, so anything is possible. Politics and trade dominate the landscape, leaving macro on the precipice. Brexit, Italian politics, Hong Kong, US/China, Kashmir and Argentina’s default are all deserved of investors’ attention. The resulting and predictable equity volatility – particularly derived from the worsening US/China trade situation – has seen US markets fall from their record highs. The bigger story is in rates. The government bond rally has seen yields collapse in August, with curves flattening and/or inverting as markets position for the next round of central bank activity. It has seen Eurozone government bonds return 10.5% in 2019 so far!

The US Treasury curve has flattened or inverted across the various metrics, which would usually indicate that a recession is just around the corner. Further action is imminent from both the Fed and ECB as they try and avert more downside and recession. A (likely) negative GDP print in Q3 for Germany would signal a technical recession for her economy, while the 10-year Bund yield has plummeted in August – and by 28bp at one stage, to record a historic low of -0.728%.

Investors, though, are lording it from a performance perspective, especially in fixed income with returns heading for the moon. It’s great for 2019, but total return markets will resemble a dustbowl in 2020.

In the safest of haven debt markets (government bonds), where yields are embedded deep in negative territory, it has now become extremely difficult to envisage the process that sees a return to normality (positive yields). Thus negative yields – across entire sovereign curves – are something that we need to get used to. The traditional methods used to attack the malaise in macro and markets will likely fail in producing the desired results, in our view.

So as fresh blood (more liquidity) is injected courtesy of the ECB, those Bund yields – dare we say it – are heading lower. In credit, despite having backed-up in August amid high levels of equity volatility, we think that IG credit spreads will head into record territory. There is some way to go, but we can expect a ratchet tighter once the central bank announces its intentions next week.

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