Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Monthly Fixed Income Chart Pack
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Saxo Bank is launching a monthly chart pack for the fixed income market. Our goal is to provide better visual insight over critical topics within the bond market. Enjoy!
US Treasuries
10-year yields are still trading in a short term uptrend. If they break their upper falling trend line (red) they will find resistance at 2%.
10-year yields have been consolidating in the past few weeks, but if bullish momentum resumes, and break above 1.60% they could resume their rise towards 2%.
10 year Treasury Futures is likely find strong resistance at 133.22 (around 1.40% in yield), making a downward trend to 130 more probable.
Nominal yields are still lagging inflation expectations.
TLT ETF (iShares 20+ Year Treasury Bond ETF) continues to suffer outflows, strengthening our expectations of higher US Treasury yields.
US Corporate bonds
Lower rated corporate bonds within the investment grade and junk bond space are paying the tightest spread in nearly 15 years. CCC corporate bond spreads are about to fall to levels previously seen before the global financial crisis.
Zombies are everywhere: US Corporate risk is at the highest level in twenty years, but investors are not compensated. Average Net-debt-to-Ebitda of the S&P 500 is 2.2x, CCC US Corporate bonds offer 6.4% in YTW.
Emerging markets USD sovereign bonds
On average, Emerging markets pay a higher YTW compared to US junk bonds (4.4% versus 4.1%). Yet, their average duration is 8.5 years, more than double than the average duration in the junk bond space.
EM USD sovereign bond OAS over US Treasury is trading in the lower bound of its horizontal trending channel. However, the countries’ debt-to-GDP ratio continues to rise.
European sovereign bonds
If Ten-year Bund yields break above -0.20%, they can quickly rise to 0.15%. If they break above this support level they will find strong resistance at 0% next.
Once hedged against the euro, 10-year US Treasuries pay a yield similar to the one of 10-year Greek government debt.
Bund futures are not poised to break out bullish just yet. If they break out to the upside there is room up to 172.65. After the short-term rebound they look poised to continue lower to find resistance at 169.
European corporate Bond space
Lower rated corporate bonds within the investment grade and junk bond space are paying the tightest spread in nearly 15 years.
Zombies are everywhere: European Corporate risk is at the highest level in twenty years, but investors are not compensated for such risk. Average Net-debt-to-Ebitda of the STOXX 600 (excluding financials) is 2.45x, at the same time investors are paid the lowest YTW in history.
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