Partial recovery

Mid-Week Bond Update

Partial recovery

Global bond markets pared some of this month’s losses, boosting corporate sectors, although government debt remained pressured. High Yield spreads tightened, while Emerging Market (EM) debt continued to shrug off developed nations’ woes. The South African rand led EM currency gains, buoyed by Ramaphosa replacing Zuma as president. The Brazilian real surged following improving inflation data - read more below.


Brazil - inflated: The real rose 1.5% against the US dollar over the past five trading days, boosted by an improving inflation outlook. Some investors believe the drop in inflation and looser monetary policy could foster growth and might therefore strengthen the currency. According to a weekly central bank survey, the country’s leading IPCA Consumer Price Index will end the year at 3.8%, or 0.5% below the official target. The publication also held its forecast for the country’s key interest rate (the Selic), at the present level of 6.75%, which gave some support to the currency and contradicted those who believed that falling inflation could lead to further rate cuts. As seen on the chart, Brazil’s annualised inflation (blue line) has dropped, and so has the Selic rate (grey) line, while the currency has stayed relatively steady at 3.25 real per US dollar.


Brazil’s real: holding steady

Brazil Real Inflation

Source: Bloomberg as of 21 Feb. 2018. CPI is Consumer Price Index; the Selic rate is Brazil’s leading key policy rate; USD is US dollar. RHS is Right Hand Side. Please see disclaimers for definitions.


High Yield – pause for breath: Following a tough February start, US High Yield (HY) bond returns surged over the past five trading days, as the recent bond sell-off triggered by higher US inflation figures cooled down a bit. The premium that investors pay to hold US HY debt over Treasuries narrowed to 337 basis points (bps), down from the 369 bps it reached 2 weeks ago – which had been the highest since November last year. Despite recent sector outflows, the asset class is supported by a low default rate and improving US growth prospects.




Yen & Treasuries – parting ways: After years of almost synchronised moves, the yen and US Treasury yields seem to have parted ways. Once both seen as safe-haven bastions, to which investors flocked to in market sell-offs, the two seem to move now more according to their own domestic stories, now fairly different. While US government yields have crept up as markets price in stronger inflation and growth, the dollar has failed to catch up with such enthusiasm, dragged down by the country’s rising budget and trade deficits, as well as by an Administration that has publicly supported a weak dollar in order to boost exports. Meanwhile, the yen has strengthened, not only against a relatively weak dollar, but also mirroring Japan’s economic improvement: the country’s Manufacturing Purchasing Managers’ Index reached in January a four-year high of 54.8. The yen is also seen as a stable currency, especially after the recent re-election of Haruhiko Kuroda as central bank governor for a second term. The appointment is expected to bring continuity to Japan’s ongoing monetary stimulus.


Treasuries and yen: it’s a different story now

Treasuries and Yen

Source: Bloomberg as of 21 Feb. 2018. USD is US dollar; RHS is Right Hand Side. Please find definitions in the disclaimer.


US inflation expectations – less buoyant: After a steady rise in January and early February, inflation expectations slightly fell over the past five trading days, mirroring a similar pause in the recent rise of US Treasury yields: the US Federal Reserve’s (Fed) favourite inflation expectations measure, the five-year forward breakeven inflation rate, softened to 2.1457%, down from 2.1902% earlier this month. Similarly, the US Treasury 10-year yield traded at 2.88%, after surpassing 2.9% last week. US data continues to show mixed signals, making some investors believe that the economy is gaining traction and interest rates could rise more than expected, while others state that some secular forces are constraining price growth and therefore, may keep the Fed’s planned hiking rate cycle steady.


Source for all data: Bloomberg and Barclays Capital as of 21 Feb. 2018, unless indicated.


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