Italy Maintains Investment Grade Status: Moody's Decision Confirmed!
In a crucial development for Italy's economic landscape, Moody's has confirmed the nation's BBB- sovereign debt rating after conducting a comprehensive review of its credit profile. This decision reinforces Italy's investment grade status, providing stability and reassurance to the market. The anticipated outcome is evident in the behavior of the spread between Italian and German 10-year yields, which has remained steady, along with remarkably low volatility in this spread over the past few weeks. Source: Bloomberg
How long can the Bank of Japan maintain its ultra-accommodating policy?
As Japan's core Consumer Price Index (CPI) reaches an impressive milestone of 4%, the nation finds itself at a pivotal juncture in its inflation landscape. This surge places Japanese inflation well above the Bank of Japan's (BoJ) target. While the BoJ's specific objective remains the maintenance of stable inflation at around 2%, the question arises: How long can the BoJ sustain its ultra-accommodative policy stance? With Japan's staggering debt-to-GDP ratio surpassing 200%, finding the right balance becomes crucial in addressing the potential challenges of runaway inflation. Source: Bloomberg
📉 Significant drop in High Yield volatility!
The recent sharp decline in European High Yield volatility highlights the market's complacency towards this fixed income segment. 📊 Examining the 30-day price volatility over the past decade, the High Yield index has reverted to 2021 levels, now standing one standard deviation below the average. 💼 Is the anticipated future recession in Europe already fully priced in on the soft side? Source : Bloomberg, RBC.
Attractive high quality European corporate bonds?
🌍 European investment grade corporate bonds offer some of the most attractive yields in a decade. 📉 Multiple factors contribute to this level, including the European Central Bank's sudden monetary policy tightening and widening credit spreads resulting from concerns over a deeper recession in Europe and higher default rates. 💼 The recent Credit Suisse event has further increased the European premium, creating compelling opportunities. 📈 Currently, the EUR swap curve (the reference curve for corporate refinancing in EUR) is historically high compared to the German yield curve, due to factors such as the supply shortage and the flight to quality. ❓ Despite the risk of recession in Europe, should we take advantage of the attractive long-term entry points of the European high quality credit segment?
Treasuries reaction to debt ceiling result will be noisy
One look at the recent price compression for 2-year Treasury futures and its clear that bond traders have a lot resting on the outcome from the debt ceiling talks.
If a deal is reached -> Fed speakers become the key for direction
No deal -> The X-date comes into play
Source: Bloomberg
⏬ Time to consider a shift for the Central Bank of Brazil?
🇧🇷 Brazil's Consumer Price Index (CPI) is nearing the end of its normalization process, hitting a low of 4.18% in April, the lowest level since October 2020! 📊 The Banco Central do Brasil (Central Bank of Brazil) took proactive steps by raising its key rates (Selic rate) early on to address inflationary pressures. Their actions have yielded positive results, bringing inflation back in line with Brazil's historical patterns. ⚖️ The potential for rate cuts is now significant, particularly if Lula appoints his preferred candidates, like Gabriel Galípolo, to influential positions within the Brazilian central bank. President Campos Neto is widely respected as one of Latin America's top central bankers. However, his focus on controlling inflation rather than stimulating Brazilian growth, coupled with his association with former President Bolsonaro, may put his position at risk. 🛑 Is Brazil on a similar trajectory as Turkey, where concerns arise over the central bank's alignment with the government? Source: Bloomberg
U.S High Yield credit spreads hit 500bps !
📈 The Markit CDX North America high yield index has surpassed the 500bps mark for the first time since March. This index serves as a reliable measure for tracking the upper quality of the US high yield market. 💰 While absolute yields may seem appealing, it's important to note that US high yield credit spreads are not cheap and could potentially widen further. This could be influenced by the sharp tightening of bank lending standards, the drop in US PMI/ISM surveys, and the gradual deterioration of the US employment market. 📉 Despite solid fundamentals at the moment, it begs the question: Do the current levels of US high yield credit spreads indicate an imminent rise in defaults or a forthcoming recession? Source : Bloomberg.
The correlation between stocks and bonds has become very negative again!
📊 The 50-day correlation between US stocks and the intermediate part of the US Treasury yield curve has hit its lowest level since 2021. This may have been driven by the fact that bond volatility has declined (although it remains at a high level) and the economic outlook is increasingly uncertain. 💼 In light of this, bonds remain a crucial component of a well-diversified multi-asset class portfolio, especially as we navigate the increasingly uncertain second half of 2023. 📈 Will bonds regain their status as a safe asset? Source : Bloomberg
