Despite a slower rate of job creation, the Federal Reserve continues to signal that it will start tapering asset purchases in November and begin to raise rates next year.
So far, there has been little evidence of a market tantrum at this prospect and risk assets remain far more concerned with a global inflation spike amidst some rampant moves in commodity prices. Energy prices have certainly given everyone something to think about as LNG prices continue to spike (with some impressive intraday moves) and crude prices now joining in. Post peak pandemic activity has continued to strengthen, at what point input prices and supply chain bottlenecks/disruption begin to put the brakes on this hard is concerning, the recent monthly drop in German manufacturing numbers by 4% is clear evidence of these effects.
The usual shenanigans surrounding the debt ceiling in the US caused some distraction as did the domino effect of several other heavily indebted Chinese property companies being unable to meet their obligations but yields on US Treasuries continue to inexorably rise, the 10-year gaining 1.6% and the Long Bond well over 2% now yielding 2.1%. As the expiration of the end 2021 deadline for LIBOR approaches most markets that previously used these reference rates have made the transition successfully, to SOFR in the US, EONIA in the Eurozone and SONIA in the UK. But of course, we have to have one market with its head in the sand: the leveraged loan market. Of the 12,000 leveraged loans issued this year just three reference SOFR (the rest still LIBOR) and a deal in the market now will be the first to reference Term SOFR, not a great performance by issuers or the regulator.
Hawkish rhetoric by the BoE has increased several notches and Gilt yields have responded accordingly, the Governor and some MPC members have warned that inflation might not be as transitory as anticipated. The yield spread between 10-year Gilts and Bunds reached 125bp, a level not seen since 2016 in the pre referendum era, and this means the 10-year Gilt has moved nearly 100bp this year (near 9% in price). The ECB is considering yet another asset purchase program for when the PEPP expires to avoid undue volatility.
Credit spreads have held steady (although HY has borne the brunt of any moves) and the new issuance machine remains undeterred. Every man and his dog is now issuing ESG credit, the majority of these bonds have bullet proof credentials but some will be better than others, the most reliable will be our Green Gilts, the DMO starting to build out their curve announcing a 32-year (?) issue.