US

Looking at the state of the Turkish economy since President Erdogan decided to meddle in the affairs of its central bank; with the Lira down about 20% vs the US dollar, inflation running at 15%, and the yield on the 10yr government bond running at almost 17%, you might be tempted to think that most leaders would stay well away from the subject.

Credit metrics, as measured by the rating agencies, continued to improve throughout the first half of this year, with all corners of the globe having comfortably more upgrades than downgrades.

In recent weeks we have talked often about the tightening of lending standards, the possibility of the end of dot plots, and especially the shape of the US yield curve – today’s blog encompasses all three.

Following on from our recent comment on the level of Italian BTPs and how this has a potential to impact the transmission mechanism, it is interesting to note the subtle but important changes that have been applied elsewhere across the global economy.

Aside from the fact that he is Italian and once served as governor of the Italian central bank there are other reasons why Mario will be concerned at the price action in Italian Government Bonds (BTPs).

During and since the global financial crisis the Federal Open Market Committee (FOMC) has done a remarkable job in navigating the US financial system under extremely challenging circumstances, setting the standard for other central banks to follow.

After another week of yield curve flattening, we now have the 2s-10s curve in US Treasuries at just 43 basis points.

Having written recently about our thoughts on how the yield curve might flatten, we should also note that whilst this, our base case scenario, is happening at the moment, there are a number of other potential strong influences that we need to monitor as they have the ability to prolong this flattening.

Having discussed the shape of the yield curve as a recessionary indicator already last week, we would like to elaborate on what other indicators we look at as fixed income investors to determine where we are in the economic cycle, which in turn determines how we position ourselves on the yield curve and whether we look to credit risks or government bond risks.

The rapidly flattening US Treasury yield curve is prompting a lot of questions about the shape of the curve and it being a good predictor of upcoming recession.

As we now are well into the Q1 earnings season we have been debating how the current quarter could well be the best for risk in 2018.

A lot has been packed into a short week but, despite all the political posturing and rhetoric surrounding trade tariffs, it is still central bank policy that ultimately drives market sentiment and this week we have seen key inputs from leading players at the most important central bank of all, the US Federal Reserve, that have been somewhat overshadowed by more sensationalist news from the political arena.