What happened last week?

  • Central banks: Last week was rich in monetary decisions by central banks. All major central banks raised interest rates again, but with different magnitudes and language. In the U.S., the Federal Reserve raised Fed Funds rates by 25 basis points with a more dovish tone than expected. While two more 25 basis point hikes and a final rate above 5% are expected, Chairman Powell qualified this by saying that there is "no incentive, no desire to tighten rates excessively" and that one should not be too concerned about the current easing of financial conditions. In Europe, the ECB raised its deposit facility rate by 50 basis points and confirmed that another 50 basis points is well anchored for March. But President Lagarde has toned down inflationary pressures a bit ("more balanced"). Finally, the Bank of England (BoE) also raised rates by 50 basis points with a dovish statement on inflation. Governor Bailey expects inflation to return to 2% by 2024.
  • Rates: U.S. Treasuries gained 2.5% in January but have fallen slightly since the beginning of February. The strong jobs report put pressure on the entire U.S. Treasury yield curve. The U.S. 10-year bond yield rebounded 13 basis points to 3.52 percent on Friday, while the U.S. 2-year bond yield jumped nearly 20 basis points to 4.29 percent. The MOVE index, which measures the volatility of U.S. Treasury rates, ended the week below 100 for the first time since June 2022. In Europe, German bonds continue to perform well in February (+0.6%) after already adding 1.9% in January. The German yield curve is down 4 bps for the week. Finally, Italian bonds were among the best performing governments in January (+2.9%) and have started February well (+1.4%).
  • Credit: U.S. investment grade bonds performed exceptionally well in January, gaining 4%. Credit spreads have now reached their lowest level (115bps) since April 2022. In high yield, a similar performance (+3.8%) was recorded in January but mainly driven by a tightening of spreads (-50bps). The Bloomberg U.S. High yield ended the week with a credit spread of 385bps, a level not seen since May 2022. In addition, the spread between U.S. high yield bonds and 3-month U.S. T-Bills is at its lowest level since 2008 (see chart of the week below)! In Europe, an improving growth outlook boosted credit performance in January. European investment grade bonds gained 2.2% in January and are already up nearly 1% in February, while European high yield bonds ended the month with a 3.2% return and begin February with a gain of over 1%.
  • Emerging market: Emerging market corporate bonds posted a gain of over 3% in January and are positive again in February. Investor sentiment remains constructive as inflows continue to fuel this strong performance. Despite a weaker dollar, emerging market debt in local currency slightly underperformed the market with a modest gain of 1.7% in January. Once again, news flows were driven by the Adani Group story last week. The rating agencies started to move: all three agencies lowered their outlook to negative but maintained the BBB- rating on Friday night.

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:

The yield spread between U.S. high yield bonds and 3-month U.S. T-Bills is at its lowest level since 2008!

Picture1-Feb-06-2023-02-54-13-0842-PMSource: Bloomberg


The excess yield offered for U.S. high yield bonds is now the lowest relative to 3-month U.S. T-Bills since 2008. While the yield (7.8%) on the Bloomberg U.S. High Yield Corporate Bond Index is still slightly above its historical average (7.6%), its credit spread (385 bps) is well below its historical average (500 bps).

Is US high yield in danger?


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