What happened last week?
Central banks: In the U.S., Fed Chairman Powell made hawkish remarks to Congress and the House Financial Services Committee. He deliberately opened the door to a higher terminal rate and a 50 bp increase at the March FOMC meeting! But that was before the Silicon Valley Bank (SVB) story. The market is now expecting less than a rate hike (25 bps), while investment banks (Goldman Sachs, Natwest) are starting to bet on no hike from the Federal Reserve. On Tuesday, the U.S. Consumer Price Index (CPI) is expected to determine whether to not raise rates, to raise rates by 25 bp, or to raise rates by 50 bp. In Europe, the ECB will release its latest rate decisions. A 50 bp increase is expected, unless the SVB story changes the minds of ECB members.
Rates: The Silicon Valley Bank story put the brakes on rising interest rates. U.S. Treasuries had their second best week of the year at +1.7%. Over the course of the week, the downward movement in yields (-30 bps) was fairly similar at both ends of the curve. The 2-year U.S. Treasury yield is on track for one of its biggest declines. At the time of writing, it has lost nearly 100 bps since its peak on Wednesday. Interest rate volatility (the MOVE index) climbed to 140 bp by the end of the week, not far from its all-time high. The contagion also reached the European Treasury market, which gained 1.7% last week. For now, peripheral rates are holding up: the difference between Italian and German 10-year yields remained stable (181bp) over the week.
Credit: U.S. Investment Grade (IG) corporate bonds had a positive week thanks to the strong performance of U.S. Treasuries. It is worth noting that IG credit spreads had their widest weekly widening since March 2020! High yield (HY) bonds fared even worse, with a negative total return of nearly 0.9% on the week. HY credit spreads widened by more than 50 bp to 450 bp, a level not seen since the beginning of the year. In Europe, the credit market was quieter with a 0.9% gain for European investment grade bonds without significant spread widening (+3bp) while high yield bonds performance was flat (-0.03%). Note that the difference between the Itraxx Xover and the CDX HY has now reached over 70bp, a level not seen since March 2020.
Emerging market: Emerging market corporate bonds held up well last week (+0.5%), thanks to contained credit spread widening. Note that investors withdrew money from Emerging market fixed income funds for the 5th week in a row.