Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Stable Bond Spreads and Robust Issuance Make a 50 bps Rate Cut in September Unlikely
Althea Spinozzi
Head of Fixed Income Strategy
Summary:
- Corporate bond markets indicate that expectations for a 50 basis points rate cut by the Federal Reserve in September are unrealistic.
- High-yield (HY) and investment-grade (IG) bond spreads remain historically tight, with current spreads close to long-term averages.
- Stock market volatility has surged, but bond market volatility remains well below the spikes observed during recent rate hikes, indicating relative stability.
- The robust U.S. primary bond market suggests recession fears may be overstated. Investment-grade and high-yield bond issuance are at high levels, meeting strong demand.
Bond Markets Remain Resilient Amid Recent Market Selloff.
The recent selloff doesn't justify the market's expectation of a 50 bps rate cut by the Fed in September.
Credit spreads for both high-yield (HY) and investment-grade (IG) corporate bonds remain tight by historical standards. Over the past 10 years, the CDX IG 5-year spread has averaged around 66 bps, currently trading at 60 bps. Similarly, the CDX HY 5-year spread has averaged 380 bps, which aligns with current pricing.
While stock market volatility has surged to levels reminiscent of the COVID-19 pandemic, the MOVE Index, which measures implied volatility in the U.S. Treasury markets, has also risen but remains within the range observed throughout 2022 and 2023 during the Federal Reserve's rate hikes. This suggests that while equity markets are experiencing heightened uncertainty, the bond market's volatility expectations are more tempered, reflecting a degree of stability amid economic deterioration fears.
The Fed needs to witness more significant economic distress before considering a more dovish stance.
Elevated Issuance in H1 2024 Demonstrates That Tight Spreads and High Yields Are No Obstacle to Demand or Supply.
The continued smooth functioning of the primary bond market also suggests that recession fears may be overstated. Typically, a freeze in the primary market is a bad omen for bond markets, indicating that investors are highly risk-averse. However, the U.S. primary bond market remains robust. Investment-grade bond issuance has reached its highest volume since the first half of 2020 and is the second largest first-half issuance in the past decade. High-yield bond issuance in the first half of 2024 is the highest since the first half of 2021 and the third largest first-half issuance in the past ten years.This strong supply is clearly meeting demand, as evidenced by investment-grade and junk bond credit spreads, which have stayed at the lower end of their five-year trading ranges—93 basis points for investment-grade bonds and 313 basis points for high-yield bonds as of the end of July. The attractive yields, the highest seen since the global financial crisis, are likely driving investor interest. Despite being lower than their peaks in 2022-2023, current corporate bond yields remain considerably high compared to the 2008-2021 period, standing at 5% for investment-grade bonds and 7.8% for high-yield bonds.
Other recent Fixed Income articles:
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05-Aug Why Investors Must Pay Attention: BOJ’s Hawkish Moves Could Roil Global Markets
30-July BOE Preview: Better Safe than Sorry
29-July FOMC Preview: A Data-Dependent and Balanced Approach
24-July Market Impact of Democratic vs. Republican Wins
23-July Insights into this week's US Treasury auctions: 2-, 5-, and 7-year overview.
16-July Insights into this week's US Treasury auctions: 20-year U.S. Treasury bonds and 10-year TIPS.
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08-July Surprise Shift in French Election Fails to Rattle Markets for Good Reasons.
04-July Market Optimism Ahead of French Elections Drives Strong Demand for Long-Term Bonds
01-July UK Election Uncertainty and Yield curve Dynamics: Why Short-Term Bonds Are the Better Bet
28-June Bond Market Update: Market Awaits First Round of French Election Voting.
26-JuneBond Market Update: Canada and Australia Inflation Data Dampen Disinflation Hopes.
30-May ECB preview: One alone is like none at all.
28-May Insights into this week's US Treasury auctions: 2-, 5-, and 7-year tenors overview.
22-May UK April’s Consumer Prices: Markets Abandon Hopes for a Linear Disinflation Path.
17-May Strong trade-weighted EUR gives ECB green light to cut rates, but bond bull rally unlikely
14-May UK labor data and Huw Pill's comments are not enough for a bond bull rally
08-May Bank of England preview: Rate cuts in mind, but patience required.
06-May Insights into this week's US Treasury refunding: 3-, 10-, and 30-year overview
02-May FOMC Meeting Takeaways: Why Inflation Risk Might Come to Bite the Fed
30-Apr FOMC preview: challenging the March dot plot.
29-Apr Bond Markets: the week ahead
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22-Apr Analyzing market impacts: insights into the upcoming 5-year and 7-year US Treasury auctions.
18-Apr Italian BTPs are more attractive than German Schatz in today's macroeconomic context
16-Apr QT Tapering Looms Despite Macroeconomic Conditions: Fear of Liquidity Squeeze Drives Policy
08-Apr ECB preview: data-driven until June, Fed-dependent thereafter.
03-Apr Fixed income: Keep calm, seize the moment.
21-Mar FOMC bond takeaway: beware of ultra-long duration.
18-Mar Bank of England Preview: slight dovish shift in the MPC amid disinflationary trends.
18-Mar FOMC Preview: dot plot and quantitative tightening in focus.
12-Mar US Treasury auctions on the back of the US CPI might offer critical insights to investors.
07-Mar The Debt Management Office's Gilts Sales Matter More Than The Spring Budget.
05-Mar "Quantitative Tightening" or "Operation Twist" is coming up. What are the implications for bonds?
01-Mar The bond weekly wrap: slower than expected disinflation creates a floor for bond yields.
29-Feb ECB preview: European sovereign bond yields are likely to remain rangebound until the first rate cut.
27-Feb Defense bonds: risks and opportunities amid an uncertain geopolitical and macroeconomic environment.
23-Feb Two-year US Treasury notes offer an appealing entry point.
21-Feb Four reasons why the ECB keeps calm and cuts later.
14 Feb Higher CPI shows that rates volatility will remain elevated.
12 Feb Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high.
06 Feb Technical Update - US 10-year Treasury yields resuming uptrend? US Treasury and Euro Bund futures testing key supports
05 Feb The upcoming 30-year US Treasury auction might rattle markets
30 Jan BOE preview: BoE hold unlikely to last as inflation plummets
29 Jan FOMC preview: the Fed might be on hold, but easing is inevitable.
26 Jan The ECB holds rates: is the bond rally sustainable?
18 Jan The most infamous bond trade: the Austria century bond.
16 Jan European sovereigns: inflation, stagnation and the bumpy road to rate cuts in 2024.
10 Jan US Treasuries: where do we go from here?
09 Jan Quarterly Outlook: bonds on everybody’s lips.
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