TwentyFour

We have often started our portfolio discussions with clients this year with what we don’t like in fixed income. Unfortunately the list for 2018 is relatively long and quite large when measured on a market cap basis.

HSBC released its Q1-2018 results this morning which were a little underwhelming with bottom line profit before tax a touch below estimates (down 4% on Q1-17) and return on equity of 7.5% (compared to 8.0% in Q1-17), but that aside the numbers give investors little concern.

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.

Following on from Gary’s recent blog Credit Still Being Cycled, this week the ECB released their quarterly Euro Area Bank Lending Survey for the first quarter of 2018, and it paints a slightly different picture to the Bank of England’s report in one area in particular.

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.

"One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand."

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.

Yesterday the Bank of England released its quarterly Credit Conditions survey, which as our regular readers know, along with the Fed’s Loan Officer survey and the ECB’s Bank Lending Survey, we consider to be an important indicator on the health of the credit cycle. 

When valuations in fixed income are this stretched, we must be on the lookout for overbought assets to avoid, and unloved assets offering a rare opportunity to pick up yield.

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.

Last Wednesday the Fed raised interest rates in the US for the sixth time since it began this hiking cycle at the end of 2015.