US

If you were on vacation last week, your holiday blues wouldn’t have been helped when you looked at your screens this morning, given how quickly sentiment has changed, mainly on the back of one data point.

The last few weeks have seen former President Donald Trump establish a lead over current President Joe Biden across polls in the run-up to November’s US election. Even though it is early days and a lot can change before November (including the Democrat candidate), it is worth considering what a second Trump term might mean for the world economy and for fixed income markets.

One of the drivers of the dovish pivot from the Federal Reserve (Fed) in December was the acknowledgement that the risks to the policy outlook had become more two-sided. In other words, while higher rates were still needed to tame inflation, the Fed saw a risk that staying restrictive for too long and risk damaging a labour market that has so far shown remarkable resilience.

The forecast-defying strength of the US economy has been one of the key drivers of financial markets in recent quarters, but as economic prospects diverge, Europe is where we see the better relative value in fixed income today.

Consumer Price Index (CPI) inflation as an entrée was well received by the diners, prompting a 15 basis points (bps) rally in the 10-year Treasury. The main course though, was met with some adverse critiques as the Federal Open Market Committee (FOMC) delivered a slightly more hawkish dot plot than expected.

From a US high yield (HY) perspective, the month of May turned out to be one of note – for the first time since December 2022, no US HY defaults were recorded, with not one instance of a bankruptcy filing or a missed interest/principal payment.

TwentyFour Asset Management’s Chris Bowie, takes a closer look at how he is thinking about duration within fixed income portfolios and shows how following conventional wisdom on duration might prove costly for some investors this year.

The European Central Bank (ECB) will almost certainly start their rates cutting cycle next month. Supportive inflation data and clear guidance from the governing council has driven market implied probabilities of a June cut to almost 100%, with little in the way to derail that.

The Federal Open Market Committee (FOMC) meeting was a relatively uneventful one, but there are a few points worth highlighting.

Money supply measures such as M1 and M2 enjoyed a relatively brief period of fame and glory just after the pandemic.

The NFIB (National Federation of Independent Business) survey can most certainly be considered an important report that monitors the pulse of the US economy.

We saw a great disparity among strategists in terms of default-rate projections for this year. With the cost for corporates to refinance their debt considerably higher than we saw in 2020 and 2021, and an elevated volume of upcoming maturities, many market participants predicted a default rate markedly higher than what we have seen so far.