Bond yields up and gold up?
This looks like a classic 1970s action, with the inverse relationship between gold and 10-year Treasury yields starting to decouple. Gold is at all-time highs in the face of bond market weakness. This, coupled with the rise in commodity prices (especially oil / gasoline), could mean troubles for the Fed and the banks. Source: Bloomberg, Lawrence McDonald
Impact of Higher Oil Prices on US Breakeven Rates 🛢️
📈 In recent months, the surge in oil prices has played a pivotal role in the noticeable increase in US Long Term breakeven rates, with a significant rise of 20 bps since the end of December. This trend underscores the nuanced dynamics that influence US Treasury nominal rates, which are comprised of the sum of real yields and inflation expectations (as captured by breakeven rates), alongside the impact of the term premium on longer maturities. Traditionally, long-term US breakeven rates have closely mirrored the Federal Reserve's inflation target of 2%, maintaining a 25-year average of 2.05%. This long-term alignment has served as a benchmark for inflation expectations and a guide for monetary policy. However, the aftermath of the pandemic has ushered in an era of elevated breakeven rates, with the 10-year US Breakeven rate averaging 2.33% since September 2020. This elevation signals market anticipations of persistently higher inflation over the next decade, influenced by factors such as deglobalization trends, sustained supply chain challenges, and increased commodity prices, notably oil. The correlation between rising oil prices and the uptick in US Long Term breakeven rates is stark, highlighting how energy costs can act as a bellwether for inflation expectations. The accompanying chart illustrates this relationship, with oil prices' sharp rebound since December propelling breakeven rates upwards, suggesting a potential for continued increases. This resurgence in oil prices coincides with a broader recovery in global economic activity, posing significant considerations for the Federal Reserve's approach to monetary policy. The crucial question now is whether the Fed will adjust its easing policy plan in response to these inflationary signals. Source: Bloomberg
US High Yield Credit Spreads have moved down to 3.05%, their tightest level since January 2022.
US Investment Grade Credit Spreads have moved down to 0.91%, their tightest level since November 2021. Source: Charlie Bilello
In May 2020, there were 21 countries with negative interest rates. Today there are none.
Sanity has returned to the global bond market... Source: Charlie Bilello
US Treasury issuance has expanded in recent years, sending the size of the US government bond market to a record ~$27tn.
Up ~70% since the end of 2019 & nearly 6x larger than before the ’08-’09 GFC. That is making some Wall Streeters nervous. Source: HolgerZ, WSJ
Junk bond and leveraged loan issuers have cut ttheir 2024-2026 maturity wall by 40% from a year ago, according to BOA estimates.
"This episode represents one of the most aggressive instances of maturity extension in the history of leveraged finance." Source: BofA, Tracy Alloway
#ChartOfTheDay: European High Yield Faces CCC-Rated Headwinds 📊
European High Yield markets encountered headwinds last week, particularly among the weakest issuers with CCC ratings, which experienced a notable decline of -0.7%. This downturn was fueled by renewed credit concerns, exemplified by significant drops (-30 points) in the senior unsecured debt of Altice France following debt restructuring announcements, and Ardagh Packaging exploring its debt structure. These incidents follow the recent Intrum crisis, where debt collector bonds plummeted by 20 points amid restructuring talks. These developments have erased the year-to-date gains of CCC-rated bonds in Europe, which stood at +6% before last week's events. This serves as a stark reminder of how quickly circumstances can change, especially in today's volatile interest rate environment! Stay informed and vigilant in navigating the ever-changing landscape of high yield markets. #HighYield #CreditConcerns #MarketVolatility 📉
UK Yields Extend Divergence from US Yields Post-BOE Meeting 📊
The Bank of England's today meeting took a more dovish turn than anticipated. Despite holding key rates steady at 5.25%, not a single BOE member voted for a hike for the first time since September 2021. Market sentiment is swiftly adjusting, with expectations shifting from a previously anticipated rate cut in August to now eyeing possibilities in June (70% chance) and even May (15% chance). The news triggered a significant rally in UK government bonds, driving the differential between 2-year UK and US yields to its lowest level in a year! This divergence underscores the evolving dynamics in global markets. Following the surprising interest rate cut by the Swiss National Bank, central banks worldwide appear to be reassessing their strategies. Source: Bloomberg
