Three bond market trends this week


Craig Inches, Head of Short Rates and Cash

27 March 2017

Across our fixed income team we see three trends shaping bond markets this week:
1. Doves and sentiment
Wednesday saw a rally across G10 government bond markets as investors unwound their ‘Trump trades’. Concerns that investors may have been overly optimistic about the impact of the president policies saw investors returning to safe haven assets. While these moves have made headlines, the rally is merely continuing in US Treasuries, which have been rallying since last week following a ‘dovish hike’ from the Federal Reserve.
2. Short conventionals down, short linkers rally 
Gilt markets are also being driven by a flatter yield curve, with short dated yields rising and long dated yields falling. The biggest moves in short dated assets are coming from from stronger than expected recent inflation data, which have pushed down yields in very short dated index linked gilts by over 50bps during the past three days. 
3. Energy bonds have found their feet
Meanwhile, while both investment grade credit and high yield bonds are a little softer this week, with investment grade credit spreads sitting at levels similar to the beginning of March. Meanwhile, despite recent weakness in the oil price, the energy sector (which makes up a big chunk of the global high yield index) continues to look fairly robust, particularly when compared to the state of the high yield energy market last year. 
Markets have once again delivered a case of short-term sentiment first, longer term fundamentals second. Despite weeks of policy failures in other areas, investors had clung to the belief that Trump and Congress could push through meaningful tax reform. Perhaps unsurprisingly given his record in other areas, concerns over his healthcare policy have now compounded, with many having doubts over the scope and scale of any reform, compounded by fears of the president’s protectionist stance. 
In light of this, the euphoric sentiment which had driven bond yields higher has come crashing back down with predictable results. Government bonds across the board saw some sort of rally on Wednesday. This was to be expected in traditional safe havens such as Bunds and US Treasuries but performance has been particularly strong also in periphery European bonds which had recently looked jittery on the back of continued political risk. 
However, this positive blip for government markets should be seen against a backdrop of positive global growth and inflation which has been pushing yields higher since last Summer, and ultimately we expect government bond yields to move slowly upwards towards more ‘normal’ levels. A temporary rally could provide long term investors with an opportune moment to redirect their government bond allocations into shorter dated and global inflation linked assets, to better preserve their capital before yield curves steepen once again.

Across our fixed income team we see three trends shaping bond markets this week:

1. Doves and sentiment

Wednesday saw a rally across G10 government bond markets as investors unwound their ‘Trump trades’. Concerns that investors may have been overly optimistic about the impact of the president policies saw investors returning to safe haven assets. While these moves have made headlines, the rally is merely continuing in US Treasuries, which have been rallying since last week following a ‘dovish hike’ from the Federal Reserve.

2. Short conventionals down, short linkers rally 

Gilt markets are also being driven by a flatter yield curve, with short dated yields rising and long dated yields falling. The biggest moves in short dated assets are coming from from stronger than expected recent inflation data, which have pushed down yields in very short dated index linked gilts by over 50bps during the past three days. 

3. Energy bonds have found their feet

Meanwhile, while both investment grade credit and high yield bonds are a little softer this week, with investment grade credit spreads sitting at levels similar to the beginning of March. Meanwhile, despite recent weakness in the oil price, the energy sector (which makes up a big chunk of the global high yield index) continues to look fairly robust, particularly when compared to the state of the high yield energy market last year. 

Markets have once again delivered a case of short-term sentiment first, longer term fundamentals second. Despite weeks of policy failures in other areas, investors had clung to the belief that Trump and Congress could push through meaningful tax reform. Perhaps unsurprisingly given his record in other areas, concerns over his healthcare policy have now compounded, with many having doubts over the scope and scale of any reform, compounded by fears of the president’s protectionist stance. 

In light of this, the euphoric sentiment which had driven bond yields higher has come crashing back down with predictable results. Government bonds across the board saw some sort of rally on Wednesday. This was to be expected in traditional safe havens such as Bunds and US Treasuries but performance has been particularly strong also in periphery European bonds which had recently looked jittery on the back of continued political risk. 

However, this positive blip for government markets should be seen against a backdrop of positive global growth and inflation which has been pushing yields higher since last Summer, and ultimately we expect government bond yields to move slowly upwards towards more ‘normal’ levels. A temporary rally could provide long term investors with an opportune moment to redirect their government bond allocations into shorter dated and global inflation linked assets, to better preserve their capital before yield curves steepen once again.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.