What happened last week?

  • Central banks: Last week, markets digested the latest announcements from the various central banks while the Reserve Bank of India (RBI), the Reserve Bank of Australia (RBA) and the Bank of Mexico all raised their interest rates by 25 bps (to 3.35%, 6.50% and 10.75% respectively). In Japan, it seems that Prime Minister F. Kishida will pick Kazuo Ueda as the new governor of the Bank of Japan. This could be seen as a break with Kuroda's ultra-accommodative monetary policy, as Ueda is the first academic to lead the BoJ since the post-war period.
  • Rates: US Treasuries had their worst week in 2023, losing 1.3% on the week. Some Fed members adopted a more hawkish tone last week than J. Powell did at the last Fed meeting. This worked well as the market is now pricing in a terminal rate near 5.25% for July, its highest level in this current tightening cycle. The U.S. 10-year bond yield closed the week at 3.73%, up more than 20 bps, while the U.S. 2-year bond yield moved back above 4.5%. In Europe, the German 2-year bond yield reached its highest level since 2008 at 2.76%, while the German 10-year bond yield ended the week at 2.36%, up 18 bps. Surprisingly, in this volatile environment, Italian yields are holding their own, moving in line with German yields.
  • Credit: US investment grade bonds suffered from the sharp rise in US rates, losing 1.8% over the week. In high yield, despite a lower duration risk, a similar performance (-1.8%) was recorded last week, due to a sharp widening of spreads (+30bps). In Europe, the week was relatively more benign with a contained loss of 0.8% for IG bonds and -0.1% for high yield. European high yield spreads continued to tighten, down 10bps to 428bps over the week.
  • Emerging market: Last week, emerging market corporate and sovereign bonds lost 1.9% on the week, mainly due to the poor performance of the US Treasury. But emerging markets also suffered a series of setbacks, with Adani continuing to worry despite solid quarterly results, President Guillermo Lasso's failed referendum in Ecuador, Moody's two downgrades of Egypt (B-) and Nigeria (CCC+) and finally the tragic earthquake in Turkey and Syria.

Our view on fixed income (February):

The front end offers a decent carry and low-rate sensitivity, while the historical level of yield curve inversion argues for staying away from the long end. Recent positive economic surprises in the US, analysis and recent deterioration in liquidity could also argue for further upward pressure on long-term yields.



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 bonds have rallied impressively, outperforming investment grade US corporate bonds by more than 5% over the past six months. But rising idiosyncratic risks and the tight premium to investment grade bonds make us tactically cautious.

The contrarian view: subordinated debt!

One of our favorite fixed income segments, offering attractive valuation (in relative terms) despite the recent rally. The sector continues to benefit from strong capital position, low non-performing loan ratios and balance sheets that remains well provisioned.

The Chart of the week:

  The MOVE index back above 100!



Source: Bloomberg


Global government yields have resumed their upward trend since the last US jobs report. At the same time, the rate volatility index, the MOVE index, rebounded sharply last week, which put pressure on asset classes (credit, equities, etc.). Just when it seemed that the Fed had succeeded in reducing the uncertainty around rates, the unexpected (good) macroeconomic data complicates the equation.


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