Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

  • Central banks: In a surprise move, the Bank of Canada (BoC), after raising its policy rate by 25 bps, announced a pause at its current level (4.5%) unless economic data surprises on the upside. This statement could be followed by the Federal Reserve releasing its latest monetary decision (25bps hike expected) on Wednesday. The release of the Core PCE index (4.4%) below (1sttime since Feb 2020) the Fed funds rate should give the Fed members confidence to slow their tightening. In Europe, positive economic surprises and a surprise pickup in inflation in Spain should force the ECB to maintain its monetary tightening in the near future, with a 50bps rate hike already set for Thursday.
  • Rates:S. Treasury yields ended the week slightly higher due to positive economic data. The U.S. 10-year yield is still trading around 3.5%, allowing for less volatility in rates (see chart for the week below). In Europe, the upward movement in yields has been exacerbated by ECB comments and strong economic data. The German yield curve is up about 6 bps, while Italy's 10-year yield is back above 4% (up +10 bps on the week).
  • Credit: U.S. investment grade bonds posted another weekly gain (+0.2%), the fourth in a row. The tightening of credit spreads (-4 bps) offset the negative performance of US rates. U.S. high yield bonds also rebounded (+0.4%), but spreads still remain above 400 basis points. In Europe, positive sentiment continues to benefit European credit, especially high yield (+0.4% on the week), which is also supported by the low activity in the primary market. European investment grade bonds ended the week almost flat due to the negative performance of rates. At the end of last week, IG and HY spreads reached their lowest level since May 2022.
  • Emerging market: Emerging market corporate bonds continue to perform well (+0.3%) and closed the week at their highest level since April 2022. Despite the Adani Group story, bonds fell 15-20pts on the release of the Hindenburg report, flows continued to strengthen last week, accelerating to the highest level since February 2021. Note that Brazil will release its inflation data for January, which is expected to fall to 3.8% (from 5.9% a month ago) and is expected to keep its policy rate on hold at 13.75%.

Our view on fixed income (January):


Absolute yield levels are still supported by inflation and hawkish central banks; the bright spot remains the short end as the U.S. yield curve is deeply inverted.




Despite the recent tightening of spreads, the risk/reward remains attractive due to the high level of carry and lower rate volatility expectations. While we were already positive on the front end of the credit yield curve, we are moving to longer investments in the 5-10 year segments. 



Emerging market hard currency debt is attractive in absolute and relative terms (compared to high yield).  This asset class should benefit from falling inflation, strong fundamentals and a softer US dollar. In addition, flows have turned positive in recent weeks.


The contrarian view: 
subordinated debt!

We remain positive on subordinated. This matured and resilient asset class offers premiums despite solid capital position. Valuations remain cheap due to growth concerns. Fundamentals benefit from rising interest rates.

The Chart of the week:

Good news: the Move index is in free fall!

One of the major market detractors of 2022, the Move Index (a measure of rate volatility), has fallen sharply since its peak in mid-October 2022. This coincides with the rally in fixed income (rates and credit). The move index is now not far from its historical average (93). A further decline would continue to support fixed income investments.


Source: Bloomberg


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