Fixed Income

The bear steepening of the US Treasury curve has undoubtedly been the story of 2021 so far for fixed income investors, many of whom will have felt the adverse impact of the broad rates sell-off on their portfolios.

For fixed income investors, we think floating rate European ABS bonds could be an allocation consideration to help improve return prospects and reduce volatility.

In a developed country such as the US, a scenario of rising inflation expectations is usually accompanied by a bear steepening across maturities of the underlying yield curve.

Our year-end forecast of 1.50% for the 10-year is already looking very out of date, and it would be a brave person right now to suggest that 2% won’t be touched any time this year as the recovery gets into full flow with the Fed holding its tongue.

Last week UK Asset Resolution (UKAR) announced the sale of its final mortgage loan portfolios, bringing to a close a decade long chapter of state ownership.

In summary things are going quite well, and in this scenario a rise in government bond yields does not necessarily bring about a tightening of financial conditions.

A couple of weeks ago we wrote about Treasuries breaking new ground and the potential for them to go higher as higher inflation expectations gathered pace.

The Bank of England have just added to the debate about how much of the recent surge in savings will be deployed in the form of consumption as we return to ‘normality’.

Our end of year view on the 10 year is 1.50, but we could get there a lot quicker - now is not the time to be brave on Treasuries.

The last few weeks has seen healthy issuance in the high yield space, including multiple billion pound deals, the most recent of which, Asda, priced on Wednesday. This was an interesting deal for a few reasons, not least because it is the largest sterling high yield deal of all time

This deal, backed by a £472m pool of owner-occupied mortgages partially securitised in a previous transaction, drew over £1.2bn of orders and was printed 10-30bp tighter than initial price guidance depending on the tranche, reaching pre-COVID tights.

Ultimately, the fact that the Klockner deal is not marketed as a green loan but still includes ESG-related covenants is proof that ESG needs to be integrated into an investor’s credit work as a matter of course, something we have been arguing for years.