Our views

Yields slump on worries about Trump


Craig Inches, Head of Short Rates and Cash

18 May 2017

Across our fixed income team, we see three trends shaping bond markets this week:
 
1. Governments borrow long
In US Treasuries, yields are lower as investors stomach the daily dose of turmoil that continues to dog Donald Trump’s presidency. At the long end the UK is following this trend, with yields in long dated bonds lower over the week, although this follows recent weakness last week off the back of the recent 40 year syndication. Across the channel, while European markets lagged a little (encouraged by the result of its elections), France has also taken the chance to tap the market in longer dated debt, with a new €7bn 30 year deal attracting over €31bn of subscriptions. 
2. European corporates follow suit
In European credit markets, spreads have widened off the back of a wealth of new deals. 15% of this year’s new issuance has hit markets over the last week, with all this supply delivering a little weakness in the sector. However, sterling credit has continued to outperform with spreads tightening, though these moves have varied from sector to sector. Areas such as subordinated financial debt have been the strongest beneficiaries of this latest rally.
3. High yield borrowers meet their limit
Although European investment grade markets have been awash with fresh opportunities, high yield investors continue to see just a trickle of new deals coming through. While high demand continues to support markets, a few cracks are beginning to appear in the façade. A new issue by Premier Foods  saw no tightening from the initial price guidance, suggesting that investors are beginning to reassess the level of risk they are prepared to take when chasing yield.
 
Donald Trump is once again demonstrating his uncanny ability to move markets, although an uptick in equity volatility, dollar weakness and a rush to safe haven assets are probably not what he had in mind. US government bond prices have been pushed higher and the yield curve has flattened as this unconventional presidency continues to surprise markets. While June’s increase in the US Federal Reserve Funds rate is all but guaranteed and US consumer confidence remains high, scepticism over the prospects of any meaningful economic reform continues to linger. While the country’s continued growth means long yields should slowly trend higher, don’t rule out a further short-term rally in US government bonds should political uncertainty escalate.

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

1. Governments borrow long

In US Treasuries, yields are lower as investors stomach the daily dose of turmoil that continues to dog Donald Trump’s presidency. At the long end the UK is following this trend, with yields in long dated bonds lower over the week, although this follows recent weakness last week off the back of the recent 40 year syndication. Across the channel, while European markets lagged a little (encouraged by the result of its elections), France has also taken the chance to tap the market in longer dated debt, with a new €7bn 30 year deal attracting over €31bn of subscriptions. 

2. European corporates follow suit

In European credit markets, spreads have widened off the back of a wealth of new deals. 15% of this year’s new issuance has hit markets over the last week, with all this supply delivering a little weakness in the sector. However, sterling credit has continued to outperform with spreads tightening, though these moves have varied from sector to sector. Areas such as subordinated financial debt have been the strongest beneficiaries of this latest rally.

3. High yield borrowers meet their limit

Although European investment grade markets have been awash with fresh opportunities, high yield investors continue to see just a trickle of new deals coming through. While high demand continues to support markets, a few cracks are beginning to appear in the façade. A new issue by Premier Foods  saw no tightening from the initial price guidance, suggesting that investors are beginning to reassess the level of risk they are prepared to take when chasing yield. 

Donald Trump is once again demonstrating his uncanny ability to move markets, although an uptick in equity volatility, dollar weakness and a rush to safe haven assets are probably not what he had in mind. US government bond prices have been pushed higher and the yield curve has flattened as this unconventional presidency continues to surprise markets. While June’s increase in the US Federal Reserve Funds rate is all but guaranteed and US consumer confidence remains high, scepticism over the prospects of any meaningful economic reform continues to linger. While the country’s continued growth means long yields should slowly trend higher, don’t rule out a further short-term rally in US government bonds should political uncertainty escalate.

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.