Navigating the curve – The allure and risks of long-dated US Treasuries Navigating the curve – The allure and risks of long-dated US Treasuries

Government debt levels continue to linger in uncomfortable territory across developed markets, with fiscal deficits stubbornly high despite reasonably resilient growth and employment – especially when compared to past norms. This is not a post-crisis or post-war moment, yet debt levels resemble those of an economy fighting its way out of recession.

On 5th November China issued $4 billion worth of US dollar (USD)-denominated bonds split across two equal tranches. The orderbook was $161 billion at one point, but ended near $118 billion when final pricing was announced. The 3-year $2 billion tranche priced at US Treasury + 0bp (aka flat to UST) and the 5-year $2 billion tranche priced at US Treasury +2bp. The following morning, bonds traded up significantly and were quoted more than 30bp inside UST (specifically: China 28s -33.5bp  | China 30s -37.5bp).

‘Why would I buy investment grade credit now, spreads are so tight’ is the cry that I hear. It’s true, IG spreads have been tight for some time now, but with all in yields looking attractive fixed income shouldn’t be overlooked. I make the case that now is the time to be looking at investment grade credit in spite of tight spreads…

Recessions often appear crystal clear when analysed in retrospect. It’s easy to sit back, glance at the Bloomberg screen, and spot the evident recession we had in 2008 or the dot-com bubble of 2000.

However, discerning whether an economy is on the brink of a recession, or even if it is already are in one, is considerably more challenging. Recessions often become obvious only once they are well underway, and by then, significant economic damage may have occurred.

Fixed Income investors may find themselves shutting the curtains and hiding under the sofa this Halloween. There is much to be fearful of – deterioration of developed market fundamentals, falling labour market confidence and slowdown indicated in shipping. And that’s just the beginning!

This pumpkin spiced latte season, we take a look at seven charts which look beyond the rally we have seen in risk assets.

The standing economic orthodoxy is that Independent central bankers are adamant in their belief that their remit is purely monetary and that governments are in charge of fiscal policy.
Though at times of stress, it is well recognised that central banks should act in a coordinated fashion with national governments.

Once upon a time, a learned man watched his friends grow rich by investing in a company that promised to revolutionise trade. Attracted by the prospect of easy riches, he joined the party, but was cautious at first, investing only small amounts. He even sold his shares for a tidy profit when he felt their price could no longer be rationally justified. But, as the mania grew and the share prices kept increasing, he couldn’t resist… he bought back in, this time with more money,…

In 2020, the bond market awoke from a decade-long slumber and moved long-dated bonds higher, in what we call a curve steepening, even whilst short-end rates were (possibly) at paradigm lows. It was easy to look at this steepening move as being driven by the quite justified cutting of interest rates in response to the global pandemic and the seizure in the global economy that took place, and therefore to stop there and ignore any deeper or more subtle message.

The increasing liquidity squeeze in the Kingdom of Saudi Arabia’s (KSA) financial system has been causing heightened levels of debate for some time. A growing economy and the financial demands of the mega-projects that are under way are hoovering up cash faster than the domestic system can supply it. For context, recent reports suggest that the new city of NEOM could cost $8.8tn to build, which is around 25 times KSA’s annual budget.

I work as a corporate credit analyst at M&G and my job is to assess the credit risk of a borrower, as measured by its expected loss. OK, that is the theory; but in practice, what makes credit possible to begin with? The answer is in the word itself: credit. And although I know the answer, I decided to test my new Copilot assistant.

We’ve spent nearly two decades on this blog exploring the economic outlook, and history shows that this is especially relevant for active bond managers. Currently, risk markets are priced for a benign economic scenario. Credit spreads are historically tight, equity valuations are elevated, and interest rates are on a downward path as central banks unwind tight monetary policies to keep growth on track. The global economy appears healthy, and markets seem to have rediscovered their appetite for risk. But as always, we believe it’s worthwhile…

The US dollar has long held its position as the world’s dominant reserve currency, underpinning global trade and serving as a safe haven during periods of financial stress. This stability provided emerging markets (EM) with a reliable anchor for external borrowing, with the modern EM debt market beginning to take shape following the introduction of Brady bonds in 1989.