The macro picture is clouded by a number of issues, the most pressing being wranglings over raising (or suspending) the debt ceiling in the US.
While there is conviction that the matter will be resolved before the x date, it remains an uncomfortable prospect that the US Government could begin to default on its obligations, Fitch thinks so and has put their AAA rating on credit watch downgrade. US sovereign CDS reached levels not seen since 2008 before coming off a little and front month T-Bill rates, the first debt liabilities that would not be met, climbed to over 5.5%.
The Federal Reserve carried on regardless and hiked rates again to 5.25%. They did indicate a possible pause in June due to uncertainty over the outlook for the US economy but not an end to the tightening cycle yet as they try to balance stickier than expected inflation and a strong labour market against a tightening of credit conditions due to their recent regional banking problems.
Recent GDP numbers from Germany show that they did in fact technically enter recession in Q1. However, inflation in the Eurozone also remains at levels that entails the ECB again reiterating that they will continue to hike rates. On a better note, recent ECB stress tests of European banks saw them all ‘sail through’. Fitch downgraded France to AA- and it is intriguing how the former PIIGS have picked up the baton for EU growth, the recovery in the likes of the Greek economy is astonishing.
The BoE hiked rates to 4.5% but then stronger than expected UK inflation numbers put a cat amongst the rate-forecasting pigeons and the rise in the core rate (i.e., ex energy, food, alcohol and tobacco) to a new 30 year high is a source of real concern. The market quickly repriced and money market rates now price in 100bp of hikes to 5.5% in December. Recent advocates of buying duration were again reminded of volatility, the 30yr Gilt is down around 15% YTD.
Credit spreads have remained stable, the iTraxx main IG index and Sterling spreads have traded in tight ranges since recovering from the March banking-inspired volatility. Primary market issuers have continued to issue at favourable spreads across all currencies. We saw a $31Bn whopper from Pfizer, which attracted a book over $85Bn but also some good quality Sterling issues. The combination of spread and benchmark yields mean that there are some very attractive yields and coupons on offer and, as mentioned before, we can’t see the point in currently embracing duration.
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