Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

In the US, the Federal Reserve enters 2024 with a spotlight on balance sheet strategies, including QT and RRP operations. Recent FOMC Minutes suggest a hawkish outlook, emphasizing the implications of easing financial conditions and hinting at a delay in rate cuts. The discussion around a potential early halt in balance sheet runoff marks a strategic shift towards stabilizing reserves and enhancing policy flexibility. Richmond Fed President Barkin's reluctance to endorse early rate cuts without clear economic resilience echoes this sentiment. Despite the Fed's cautious tone, the market anticipates aggressive rate cuts for the year, still viewing the March meeting as a possible turning point. Across the Atlantic, the European Central Bank (ECB) is experiencing an unprecedented divergence between its forward guidance and market expectations. ECB Governing Council member Pablo Hernandez de Cos pointed out the uncertainty in the duration of current interest rates, emphasizing the dependence on future data in an unpredictable environment. The ECB's outlook suggests a gradual decline in inflation, with the 2% target expected to be reached by 2025 if rates are maintained. Yet, market expectations have shifted, with anticipation of nearly 150bps in rate cuts this year, significantly below the Eurosystem's projections. This contrast highlights the ongoing debate and uncertainty surrounding the ECB's policy path. Finally, the timeline for the Bank of Japan to abandon its negative interest rate policy is increasingly viewed as extending further into 2024. The combination of Governor Kazuo Ueda's cautious statements and the unforeseen challenges posed by the recent earthquake has led to a reassessment among economists, with many shifting their forecasts from January to potentially April or later.


The year began on a challenging note for credit markets, experiencing significant stress from both widening credit spreads and rising interest rates. In the US, Investment Grade (IG) bonds took a notable hit, declining by over 1% as credit spreads expanded by nearly 10bps since 2024 commenced. The reopening of the primary market has further exerted pressure on spreads. Recent tightness in credit spreads set the stage for this retracement. The situation in US High Yield (HY) is even more pronounced, with the fastest sell-off pace since last March, resulting in a drop of over 1%. HY spreads have widened by almost 40bps, and despite its typically shorter duration, HY indices have seen comparable losses to IG. Conversely, synthetic credit indices like CDX IG and CDX HY in the CDS market showed relative outperformance, with CDX IG ending almost flat and CDX HY widening by a more moderate 15bps. European credit markets displayed greater resilience. European HY bonds saw a modest 0.2% decline alongside a 7bps spread widening. However, the movement in EUR IG was more pronounced with the Bloomberg European Corporate Bond Index's spread widening by nearly 10bps, culminating in a -0.8% performance hit. Additionally, the iBoxx CoCo Bond Index retracted by over 1% over the week. These developments reflect a turbulent start to the year, with credit markets adjusting to a combination of internal dynamics and broader macroeconomic shifts.


The year kicked off with a stark reminder of market volatility as US Treasuries retreated, shedding 1% since the year began. The 10-year US Treasury yield surged past 4%, climbing nearly 30bps in just seven trading sessions from a recent low of 3.79%. This uptick was predominantly driven by a 16bps rise in real rates, alongside a 7bps increase in breakeven rates. The shift may be partly due to significant profit-taking, as noted by a substantial reduction in long treasury positions among JP Morgan’s clients, the most significant since May 2020. Mixed economic signals, including a robust job report and mixed economic surveys, also fueled this rebound. Additionally, concerns over the 'maturity wall' with nearly $9tn in US government debt due over the next 12 months have instilled a cautious sentiment among investors. Despite these movements, the US yield curve (2s10s) has held steady at -38bps over the week, while interest rate volatility has surged, with the MOVE index climbing above 120 once more. In Europe, the German 10-year yield experienced its most significant daily jump since July 2023, ending the week 15bps higher at 2.17%. This increase was primarily attributed to a rise in real rates, with the 10-year German real yield reaching above 15bps. Positive signs from the labor market and upward revisions in business surveys, coupled with poorly received Spanish/French auctions, have contributed to this shift. The German yield curve has commenced the year on a flatter note, moving to -41bps from -35bps. While equity and credit markets bear a negative tone, peripheral spreads, notably between Italy and Germany, have remained relatively stable. Echoing global trends, UK government bonds have also faced a sell-off, with the 10-year yield escalating almost 30bps since the year's start, aligning with broader shifts in the fixed income market.

Emerging market

Mirroring the global bond market trend, Emerging Market (EM) bonds faced downturns at the start of the year. The Bloomberg EM Sovereign Bonds Index experienced a significant drop, declining over 1.5%, with longer duration bonds bearing the brunt of the impact. EM Corporate Bonds also retreated, albeit less severely, with a 0.4% decrease. As the US dollar strengthened, EM local currency bonds pulled back by more than 1%, highlighting the sensitivity to currency dynamics. The first week also saw an acceleration in EM bond fund outflows, totaling >-0.5bn, predominantly from hard currency funds. In Asia, the credit market presented a mixed picture. The ICE BAML Asia ex-Japan $ IG index tightened by 3bps to 119bps, largely influenced by developments surrounding Adani Group. The group received a positive market response as the Supreme Court's decision on the ongoing Adani-Hindenburg case was perceived favorably. Additionally, the court's stance on third-party reports and the directive for a complete probe within three months further impacted sentiment. The Asia HY index, conversely, tightened significantly by 25bps to 612bps, with Chinese real estate developers leading the gains. Positive sentiment in this sector was likely boosted by the PBOC's December loans through its PSL facility, aimed at supporting the property market. Reflecting this optimism, the iBoxx China Real Estate Bond Index has climbed over +4% since the start of 2024.

Our view on fixed income (January)


We recommend gradually extending duration, as there is an attractive asymmetry in rates, supported by expected moderation in growth and inflation. High real rates and elevated long-term inflation expectations contribute to this favorable outlook. However, we exercise caution given the ongoing reduction of the Fed's balance sheet, which affects liquidity and rate dynamics, and the anticipation of higher supply that could trigger ST shock.

Investment Grade

We favor from 0 to 10 years segments due to the steepness of the credit spread curve which fully offset the inverted U.S. Treasury yield curve. Absolute yields are still offering attractive long term entry point. Focus on high quality corporate bonds that have proven their robustness even if money market funds compete the entire credit spectrum.

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.


In Emerging Market debt, we maintain a vigilant stance due to valuation and potential risk considerations. Higher oil prices and a strong US dollar pose challenges for oil-importing EM nations, especially Asian countries, while some Latin American countries may benefit.

The Chart of the week

10-Year China Yield Nears Record Low Amid Supportive Policies!


Source: Bloomberg

While global fixed income markets start 2024 tentatively, the 10-year Chinese government yield is nearing its 2020 low of 2.46%, recently hitting 2.52%. This movement is driven by anticipated monetary easing, PBoC's capital injections, and mixed PMI data indicating potential for economic support measures. Despite contrasting PMI readings, expectations of fiscal stimulus and the PBoC's recent actions, including a weakened Yuan and increased loans, are pushing yields down. Notably, the rate differential between the 10-year Chinese yield and its American counterpart, currently at 4%, remains historically high, reflecting divergent economic and monetary policy trajectories.


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