US

For participants in financial markets a liquidity squeeze that lasts for a prolonged period is one of the most difficult environments to cope with. Correlations break down, markets trade in a vacuum, small trades lead to disproportionate price moves, relative value goes out of the window, panic sets in, selling is indiscriminate. This is where we have been for the last two weeks. So we thought we would share some of these experiences with you and try to rationalise why it is happening and when it might end.

While the European bond market was setting records last week, the US market has also begun 2020 with a flurry of transactions backed up by record inflows.

Fixed income investors are well versed in the risks of ‘fallen angels’, investment grade companies whose bonds tumble in value once they are downgraded to high yield.

It was a dramatic night last night as the Fed cut interest rates by 25bps, the first cut since December 2008, along with the premature ending to the balance sheet run off – however markets hardly moved!

The dust is slowly settling after Wednesday’s FOMC rate decision, and more importantly the following press conference where Chairman Jerome Powell literally talked the market down.

“This time next year, Rodney…”

It is that time of year when we traditionally look ahead to the new year and make predictions on the performance of various asset classes, sectors and industries.

There were sharp declines across global risk assets on Tuesday, led by tech stocks but with barely an asset class left unscathed.

A question we have been getting more frequently for from clients in recent weeks concerns US Treasuries, and more specifically how the level of UST issuance (and where along the maturity curve it arrives) will impact yields both in the rates market and further afield in the coming months.

A volatile last couple of weeks have certainly kept fixed income investors fastened firmly in their seats, with comments from Federal Reserve chairman Jerome Powell suggesting US monetary policy was “nowhere near neutrality” sending shock waves through global rates, credit and equity markets.

Having listened carefully to the FOMC news conference last night, the message to us was clear – the Fed is pushing ahead with its normalisation of rates and the gradual shrinking of its balance sheet.

Those of you who have seen or heard one of our presentations will be aware of the significant impact that the FX-basis currently has on our relative value bond selection.