What happened last week?

Central banks

In the U.S., a week filled with Federal Reserve speeches revealed a consensus to keep policy options flexible as the U.S. economy remains robust, bolstered by a strong job market and a recent uptick in inflation. Cleveland Fed President Loretta Mester suggested that the Fed might soon be positioned to begin rate cuts, contingent on forthcoming economic data. This sentiment was widely shared, although Minneapolis Fed President Neel Kashkari noted that rate cuts may not be necessary if inflation doesn't continue to decrease. Meanwhile, Chicago Fed's Austan Goolsbee and Richmond Fed's Thomas Barkin favored a cautious stance, advocating for patience in achieving inflation targets before making rate adjustments. Following Friday’s job report, market expectations have adjusted to a 50% probability of a rate cut in June, with fewer than three cuts anticipated for 2024. In Europe, ahead of the ECB's upcoming meeting on April 11th, the release of ECB meeting accounts indicated a growing readiness to relax monetary policy, with discussions acknowledging that "the case for considering rate cuts was strengthening." Although initial suggestions from some ECB members pointed to potential cuts as early as April, consensus now leans towards holding off on any rate cuts until at least June. Current market odds reflect a less than 10% chance of a cut at the next meeting but nearly a 90% likelihood by June. In the UK, a Bank of England survey showed companies planning the smallest price increases in over two years, signaling softening inflationary pressures. This trend may boost the confidence of BoE policymakers to initiate rate cuts by this summer, with market sentiment currently favoring a June (80% probability) or July start. Finally, in Japan, Bank of Japan Governor Ueda hinted that a rate hike might be on the table in the latter half of 2024, as the probability of achieving the bank's inflation target grows. Ueda emphasized that future rate decisions will hinge on the extent of wage increases and their effect on prices, with market expectations for the next rate hike poised for September, reflecting anticipated adjustments in US-Japan interest rate differentials.


During a week marked by significant turbulence in US equities, the credit market maintained a relatively steady stance. US Investment Grade (IG) credit spreads remained flat, while US High Yield (HY) spreads saw only modest widening. This stability is contrasted by a notable shift in fund flows: US High Grade funds attracted over $6 billion, reflecting a flight to quality, whereas US High Yield funds experienced outflows totaling approximately $700 million. Performance-wise, the Vanguard USD Corporate Bond ETF reported a 1% loss, predominantly influenced by rising interest rates. Similarly, the iShares Broad USD High Yield Corporate Bond ETF decreased by 0.7%. In Europe, the situation was somewhat different; Investment Grade spreads tightened to their lowest since February 2022 at 110bps, whereas European High Yield spreads remained stable at 360bps. This dynamic led to a slight 0.1% weekly loss for the iShares EUR Corporate Bond ETF, while the iShares EUR High Yield Corporate Bond ETF managed a modest gain of 0.1%. The standout performer in the European credit market was corporate hybrids, particularly the Invesco Euro Corporate Hybrid Bond ETF, which climbed 0.4% over the week, continuing its strong year-to-date advance with gains exceeding 3%. Meanwhile, European banks' CoCo bonds saw minimal movement, with the WisdomTree AT1 CoCo Bond ETF marginally down by 0.1%. Despite the broader market volatility, the credit market exhibited strong resilience and stability, highlighting its robustness in facing economic shifts and investor sentiment changes.


US Treasuries faced a challenging start to April, experiencing one of the worst days since June 2023 on April 1st—a tough hit that wasn't merely an April Fool's joke. This downturn was triggered by an unexpectedly strong US ISM manufacturing report, causing US interest rates to surge by almost 20bps. While further macroeconomic data throughout the week also pointed to a robust economy, rising geopolitical tensions, particularly between Israel and Iran, influenced market sentiment and pressured oil prices, tempering the potential rate increase. In this mixed environment, Treasury Inflation-Protected Securities (TIPS) once again outperformed their nominal counterparts, halving the losses seen in nominal Treasury bonds. So far in 2024, a 5-year TIPS has posted a slight gain, in contrast to a -0.4% loss for a standard 5-year US Treasury bond. This performance disparity suggests that the market is acknowledging the U.S. economy's resilience, as evidenced by the widening gap between US and European interest rates. The difference in the 5-year US and EUR swap rates has reached its highest point since the pandemic, driven by dynamics in inflation expectations. Recent CPI data from Germany and the Eurozone, which continued to ease for a third consecutive month on softer-than-expected prints, has bolstered confidence in the Eurozone's inflation trajectory. Despite this positive inflation outlook, European government bonds did not fare as well, declining by 0.6% over the week. The 10-year German yield ended the week up 10bps at 2.4%, while the 2-year yield remained nearly unchanged at 2.87%. In Switzerland, muted inflation increases—evidenced by a Swiss CPI reading of 1% versus the expected 1.3%— may pave the way for further rate cuts by the Swiss National Bank. In Japan, the 2-year government yield climbed to 0.21%, marking its highest level since April 2011. This rise follows comments from Bank of Japan Governor Ueda suggesting a potential second-rate hike in the second half of 2024, reflecting Japan's shifting monetary policy landscape in response to evolving economic indicators.

Emerging market

Emerging market debts showed resilience over the past week. Credit spreads in EM corporate bonds remained stable, with a slight tightening observed in EM sovereign bonds. Despite this, overall performance was affected by rising US interest rates, leading to a -0.4% weekly decline for the Bloomberg EM Corporate Bond Index and a -0.5% drop for the Bloomberg EM Sovereign Bond Index. However, there was a silver lining as EM bond funds recorded their first inflows in two months, as per JPMorgan, although year-to-date flows remain negative at -$10 billion, including this week’s inflows of +$250 million in hard currency EM bond funds. In China, robust PMI data suggests economic stabilization, yet the real estate sector continues to lag, with significant sales declines reported by major developers like China Vanke and Country Garden Holdings. These challenges have prompted an increase in the issuance of yuan-denominated bonds outside of China, taking advantage of low borrowing costs associated with the currency. March witnessed a record issuance of these "dim sum" bonds, totaling 46 billion yuan, the highest since records began in 2007 according to Bloomberg. In Latin America, Panama's government bonds were among the week's worst performers in EM sovereign bonds. This followed Fitch's downgrade, heightening concerns that Panama might lose its investment-grade status. Meanwhile, in India, the Reserve Bank of India (RBI) held its key interest rates steady at 6.50%, aligning with market expectations. This cautious approach reflects ongoing economic assessments and the balancing of growth and inflation targets within the region.

Our view on fixed income (April)


For government bonds with maturities of less than 10 years, we hold a neutral stance. This position is supported by the presence of high real yields, an anticipated peak in central bank’s tightening, a shift towards disinflation, their relative value when compared to equities, and an improvement in correlations. On the other hand, we exercise caution towards bonds with maturities exceeding 10 years. The presence of an inverted yield curve and negative term premiums diminishes their appeal, especially amidst ongoing interest rate volatility.

Investment Grade
We are more cautious on IG corporate bonds. The sharp tightening in credit spreads, reaching lowest level since 2021, has considerably reduced the margin for safety in credit. Spreads now represent less than 20% in the total yield of an investment grade bond. This “price to perfection” encourages us to be more vigilant in this segment.
High Yield

High yield bonds could come under pressure in this very uncertain environment. Recession fears, expectations of higher default rates and one of the most aggressive monetary policies are expected to weigh on this segment. The current valuation of U.S. high yield spreads implies modest default rates and the absence of inflation slippage, or a near-term recession.



Emerging Markets
Our stance remains neutral towards Emerging Market debt, specifically targeting bonds with maturities of up to 4 years and yields exceeding 6.5%. This cautious optimism is moderated by the recognition that spreads in EM corporate bonds are at their narrowest since 2018, necessitating vigilant valuation and risk assessments.

The Chart of the week

Equity and Bond Volatility: A Rebalancing Act?!


Source: Bloomberg

In recent weeks, we've seen the initial signs of a shifting dynamic in the financial markets: interest rate volatility continues its gradual decline, remaining in a high regime, while equity volatility is subtly rising due to geopolitical tensions. This change is evident in the ratio of the VIX index, a measure of U.S. stock market volatility, to the MOVE index, which tracks U.S. interest rate volatility. Historically, this ratio has been at its lowest in over four decades but is now beginning to inch upward. The question arises: Will this emerging trend persist and lead to a normalization in the relationship between equity and bond market volatilities?


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