What happened last week?

Central banks

This week's central bank narratives weave a tale of caution and anticipation across the globe. Fed officials, echoing through the voices of Thomas Barkin and Adriana Kugler, have put a spotlight on the labor market's strength and ongoing disinflation efforts, suggesting rate cuts might be on the horizon later this year, yet urging patience for now. The market's response was to temper expectations, dialing down the likelihood of a May rate cut to 70% and looking towards June with near certainty. Across the Atlantic, the ECB, with officials like Francois Villeroy de Galhau and Philip Lane expressing a guarded optimism, hinted at possible rate reductions in 2024, contingent on inflation's steady descent to the 2% target. Despite market bets on an early cut, the consensus among Eurozone policymakers leans towards waiting for clearer signs of inflation's trajectory, with June emerging as a probable starting point for easing. In the UK, the Bank of England's Jonathan Haskel, previously advocating for rate hikes, now acknowledges the potential for cuts as inflation shows signs of cooling. However, he stresses the importance of confirming these inflation trends, particularly in wages and the services sector, before adjusting policy. Meanwhile, in Japan, the Bank of Japan's Deputy Governor Shinichi Uchida underscored a cautious exit from negative interest rates, implying a gradual approach to future rate hikes. Amidst speculation of an imminent rate increase, Uchida's comments suggest a commitment to maintaining accommodative financial conditions, ensuring a smooth transition that avoids market disruptions. This week confirms a global central banking narrative of cautious optimism, with a shared emphasis on data-driven decision-making.


This week in the U.S. credit markets saw a slight retreat due to rising interest rates, exemplified by the Vanguard Corporate Bond ETF's 0.6% decrease. Yet, the market's fundamentals remain strong; issuers displayed significant pricing leverage, compressing spreads by over 33bps and paying less than 2 bps in new issue concessions. This efficiency was backed by deals being 3.8 times oversubscribed, showcasing investor confidence. The high-yield sector, particularly through the iShares Broad USD High Yield Corporate Bond ETF, found itself in positive territory by week's end, thanks to tightening credit spreads. However, the Fed's Loan Officer Survey indicated a tightening of standards and a dip in demand, posing potential future challenges. European credit markets mirrored the U.S. in feeling the pressure from increased interest rates. Investment Grade bonds saw a decline, with the iShares Core EUR Corporate Bond ETF losing 0.5% over the week, even as credit spreads stayed stable. Conversely, the European high-yield segment displayed resilience, buoyed by a positive momentum that saw credit spreads tighten significantly by 35 basis points to 350bps—marking the tightest level observed since January 2024. This tightening represents a notable pivot in market sentiment and positioning within the high-yield space. The week also saw a momentary pause in the financial subordinated debt sector, highlighted by a 0.6% retreat in the WisdomTree AT1 CoCo Bond ETF. Nonetheless, the AT1 market remained vibrant, with UBS's PerpNC7 issuance drawing immense interest, particularly from international investors, achieving a book size of $9bn from an initial $11.7bn, and pricing at a competitive 7.75%. The issuance demonstrated the market's appetite and confidence, significantly tightening from its initial price thoughts and aligning with existing benchmarks.


The U.S. rates landscape has undergone significant shifts, marking a dynamic start to February 2024. The 10-year U.S. Treasury yield, closing January at 3.9%, has surged by almost 30bps, experiencing its largest two-day increase since 2022. This movement was coupled with a slight steepening of the yield curve, as the spread between the 2-year and 10-year U.S. Treasury yields narrowed from -34bps to -30bps. Consequently, U.S. Treasuries faced a 0.8% decline over the week, deepening its year-to-date loss to nearly 1.5%. Despite these pressures, the bond market displayed resilience, notably through the robust absorption of both 10-year and 30-year U.S. Treasury auctions, which recorded high indirect bidder participation and marked the largest size on record for the 10-year issuance. Echoing the trends in U.S. Treasuries, European rates also experienced volatility, with the 10-year German yield climbing 20bps in February, though the yield curve remained relatively flat. German bonds reported a loss of almost 1% over the week, with peripheral rates marginally lagging. The spread between the 10-year Italian and German yields widened slightly to 159bps. In contrast, the UK bond market saw a notable demand at the 30-year Gilt auction, the highest since 2020, yet it couldn't fully mitigate the uptick in yields. The 10-year UK yield ascended by 15bps to 4.07%, marking a more moderate rise compared to its European and American counterparts. In Japan, the bond market witnessed a modest uptick in yields alongside a steepening yield curve. The 10-year Japanese yield concluded the week at 0.73%, reflecting the broader global trend of rising rates and adjusting yield dynamics.

Emerging market

EM have experienced a mixed start to 2024, with debt instruments primarily impacted by rising U.S. interest rates, yet corporate credit spreads in EM tightening significantly. Notably, EM corporate credit spreads have reached 250bps, a level not seen since 2018, showcasing strong spread performance. This has enabled EM corporate debt to achieve a +0.6% performance, markedly outperforming U.S. Treasuries, which have declined by -1.5% YTD. This week highlighted China's ongoing deflationary pressures, with January witnessing the fastest pace of consumer price declines since 2009. Despite this, Asian IG bonds in USD have tightened by 11bps to 99bps, while the HY index saw a significant tightening of 45bps to 581bps, boosting its YTD total return to over 3.5%, in contrast to -0.6% for Asian IG bonds. A notable development was Vedanta's bonds receiving a lift after the company prepaid $779 million to redeem a portion of its debt and extend bond maturities, averting a potential default. In Latin America, Mexico received a stable outlook affirmation from S&P at BBB+. The central bank maintained its benchmark rate at 11.25% for the seventh consecutive meeting, with forward guidance indicating potential rate cuts starting March, contingent on favorable inflation data. Conversely, Argentinian bonds faced challenges as the Milei Omnibus laws were rejected in the house of deputies. Turkey's monetary policy landscape has undergone a significant shift with the abrupt resignation of Hafize Gaye Erkan, the Central Bank's first female leader, and the appointment of Fatih Karahan. Karahan's background, including time at the New York Federal Reserve, suggests a continuation of orthodox monetary policies amid ongoing inflation challenges. Turkey's successful issuance of a $3 billion 10-year eurobond at a yield of 7.875% reflects strong market confidence and a strategic pivot towards tighter monetary policies.Lastly, India's central bank maintains its hawkish outlook, holding the benchmark repurchase rate at 6.5% and persisting with its policy of "withdrawal of accommodation" in light of inflation exceeding targets.

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

The Shifting Dynamics Between Bonds and Equities!


Source: Bloomberg

The traditional positive correlation between bonds and stocks has recently moved toward neutral, even entering negative territory on a short-term basis. This pivot reflects an economy where strong indicators lift stocks, seemingly unaffected by bonds, suggesting resilience despite higher interest rates. However, this evolution challenges the bond market's easing expectations for 2024, as each piece of positive economic data scrutinizes these outlooks. This shift in bond-stock dynamics, while complicating forecasts, offers a silver lining for global asset allocators. It presents an opportunity to diversify strategies in a landscape where stocks can thrive amidst economic strength without parallel pressures on bonds, a nuanced scenario that multi-asset managers may find advantageous.


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