US

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.

Fixed income managers always want to have the flexibility to find the best value across their investment sphere and therefore need the capacity to buy bonds in different currencies.

Several times this year we have discussed the benefits of “roll down” in an environment that for fixed income investing is particularly unfriendly. We believe roll down gains will be one of the best ways to protect portfolios in 2018 from the rising rate curves that we have been experiencing so far.

One of the most important considerations for us as bond investors is determining where we are in the economic cycle.