Weekly View - The Fed ups the pace
While US equities have been staging a revival, things have turned ugly for bonds, with US Treasuries set for their worst month since at least 2016. Ten-year Bund yields have even turned positive. Bond market participants are having to come to terms with a Fed that has become explicitly hawkish, even suggesting it could up the tightening pace, with 50 bp rate hikes in place of 25 bp ones. While we remain underweight government bonds globally, we are neutral on US Treasuries. The road ahead is highly uncertain: a big pullback in inflation from the middle of this year on and/or a big downturn in economic growth could yet upend rates forecasts. But for the moment, the big hike in US bond yields needs monitoring, as they determine pricing for a host of other assets. The rise in mortgage rates in the US is already impacting housing sales for example. We see reasons to be concerned about highly leveraged high-yield issuers in this environment, But as long as we avoid a recession and US consumer spending is resilient, spreads for higher-quality US investment-grade issuers presenting good coverage levels and low leverage could stabilise and start to look interesting again.
Opportunities are also turning up in Europe. The Norges Bank raised its key interest rate again last week, to 0.75%, and promised further, faster rate hikes ahead. This is proving good news for the Norwegian krone, one of the commodity currencies (the other is the Canadian dollar) we currently like. Germany’s commitment to stop almost all Russian oil imports this year and phase out Russian gas imports by 2024, together with the reorientation of Europe’s LNG imports also point to opportunities. Finally, the preliminary March purchasing manager indexes for Europe were better than expected, showing that business activity continues to expand…and that France is likely to weather the Ukraine crisis better than Germany.
Alongside our neutral stance on US Treasuries, we remain positive on Chinese sovereign bonds as comparatively low inflation enables the Chinese authorities to contemplate more economic stimulus, pushing up the price of Chinese bonds, which continue to offer a positive real interest spread. With a number of cities going back into covid lockdowns, we remain more sceptical on Chinese equities…and on Chinese high-yield bonds as Hong-Kong Chinese property firms admit they may miss the 31 March deadline to present audited annual results.