Monetary Policy

Speed of market movement will be a feature of this recovery as the market realises many of the same trends are firmly in place, and with the incredible technical backdrop this means lower yields as the cycle progresses.

Thursday’s ECB meeting left us in little doubt that we should expect some serious action in December, including the possibility of some new, as yet unused measures.

A cut by the Fed or the BoE from here would mean negative rates, while the ECB already has its deposit rate deeply negative at -0.5%.

The Bank’s ability to dampen market volatility has certainly been a comfort to fixed income investors; over the last month £ IG spreads have moved in a range of just 4bp and ended tighter than they started, which compares rather favourably to the 5% peak-to-trough swing in GBP-USD over the same period.

Partner and Portfolio Manager Eoin Walsh discusses Q2 performance for the Strategic Income strategy and provides his outlook for 2020.

There have been two topics concerning the yield curve in the press over the last few days, which we think merit closer attention. As regular readers will know, the US yield curve in particular is closely followed by market participants and can dictate a lot of what happens in fixed income markets globally.

A lot has been made of the recent recovery in equity markets, especially in the US, given the obvious underlying weaknesses in the economy. It is quite clear to us the economic fundamentals do not justify such high valuations in risk assets, but despite being a serious consideration in our assessment, there is often much more to valuations than just fundamentals.

The coronavirus pandemic has brought about perhaps the greatest– and fastest – repricing of risk fixed income investors have ever witnessed.

The list of policy actions from the major central banks keeps getting longer, and today the Bank of Japan has added the purchase of “as many Japanese government bonds (JGBs) as necessary” so as to keep the 10-year rate at around zero percent.

When the Fed announced last month that it would be buying investment grade corporate bonds, it was said to have thrown the kitchen sink at the coronavirus problem. After this latest move, there are holes where the kitchen cabinets used to be.

It has been a positive sign for us that despite lockdowns being enforced in most of the major economies around the world, in the last two weeks several issuers have managed to successfully raise new debt via the primary market.

After a period of material weakness in spreads and general market stress, the common ingredient to recent corporate bond spread stability and subsequent strength has been the resurgence of the primary market.