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What happened last week?
Credit
In recent weeks, the American credit market has been more sensitive to interest rate movements than to changes in credit spreads. This trend continued last week, as evidenced by the performance of the Vanguard USD Corporate Bond ETF and the iShares Broad USD High Yield Corporate Bond ETF, which registered gains of 0.8% and 0.5% respectively, aligning closely with US rate adjustments when factoring in duration. Credit spreads have held steady, with US Investment Grade at 87 basis points and High Yield at approximately 300 basis points. Remarkably, volatility in US IG credit spreads has reached its lowest level ever, and US High Yield spreads are also experiencing their least volatility since 2021. The primary market in the US was notably active last week, with significant demand for longer-term issues, which saw nearly a 4x weekly average oversubscription rate at the long end—significantly higher than other parts of the curve. Notably, the proportion of US high yield bonds trading with spreads below 200 basis points has hit an all-time high (close to 50%). In Europe, investment grade credit spreads remained constant at 110 basis points, yet the primary market was exceptionally busy, marking its fifth busiest week ever with more than €30 billion issued across over 30 deals. Despite this influx, demand stayed robust, with new issue premiums remaining very tight (less than 10 basis points) and book coverage maintaining an average of 3.2 times. European high yield spreads tightened slightly to 343 basis points. Both the iShares Core Euro Corporate Bond ETF and the iShares Euro High Yield Corporate Bond ETF saw modest gains of 0.1% and 0.2%, respectively. The standout performer in European fixed income was the contingent convertible bonds segment, with the WisdomTree AT1 CoCo Bond ETF gaining 0.5%.
Rates
US Treasuries showed resilience last week, with the iShares USD Treasuries ETF gaining 0.6%. After three consecutive months of CPI surprises, the latest inflation data did not exceed expectations, breaking the trend and bolstering the performance of US Treasuries. This outcome has helped stabilize the investment landscape in fixed income, despite ongoing challenges to fully normalize monetary policy amid persistent inflation. The 10-year US Treasury yield finished the week down at 4.41%, dropping 30 basis points from its peak in late April. Notably, despite recent selling pressures, yields have remained below the highs seen in October of the current cycle. However, the pressure on Treasuries may increase, especially from foreign investors; China, for instance, offloaded a record $53.3 billion in Treasury and US agency bonds in the first quarter. Additionally, Japan might sell US Treasuries to support the Yen. In Europe, the week was quieter, with the iShares Core EUR Govt bond ETF registering a modest gain of 0.1%. The 10-year German yield remained steady at 2.51%, consistent with levels seen four months ago. As the ECB is set to begin its normalization process in less than a month, it will be intriguing to see how the market reacts, since the last two to four months before the first rate cut generally benefit government bonds. The ECB has already reduced its balance sheet by more than 25% since starting QT, a faster pace than the Fed’s 17.5%. Meanwhile, the gap between Italian and German 10-year yields narrowed to 129 bps, a decrease of 4 bps over the week. In Japan, the Bank of Japan's first bond-purchase cut since December has driven yields to their highest levels since 2012. The 10-year Japanese yield is now approaching 1%, and the 30-year yield has surpassed 2%. This adjustment by the BoJ is part of its strategy to counter the Yen's depreciation without resorting to interest rate hikes.
Emerging market
Emerging market bonds excelled last week, buoyed by new economic initiatives in China and notable weakness in the US dollar. EM corporate bonds rose by 0.5%, with credit spreads tightening to their lowest levels since 2018 at 211 basis points. EM sovereign bonds enjoyed a gain of 0.9%, benefiting from their longer duration exposure. The standout performer was EM local currency bonds, which capitalized fully on the USD's weakness, with the VanEck J.P Morgan EM Local Currency Bond ETF posting a 1.5% gain, marking one of the best weeks of 2024 so far. China was at the forefront of emerging markets last week with the announcement of new measures aimed at accelerating the country's economic recovery. In the real estate sector, substantial policy easing is rejuvenating a vital part of the Chinese economy. Following Beijing's new directives, major cities like Hangzhou have removed all homebuying restrictions, potentially setting a precedent for other cities. This shift from a cautious policy stance to an aggressive reduction of housing inventories could significantly simplify the homebuying process and energize the market. Additionally, China has launched the sale of RMB 1 trillion ($140 billion) in long-dated bonds, with proceeds designated to stimulate the economy and fund long-term projects in critical sectors such as food security, energy, and manufacturing. This strategic move is designed to alleviate the debt burden on local governments and shift away from an over-reliance on property and infrastructure investments. The issuance of these bonds, with terms extending up to 50 years, marks a crucial step in modernizing China's economic framework and sustainably managing its debt. Against this backdrop, the Asian high-yield market has surged, now up almost 10% year to date.
