Stressing the forecasts
If you’ve been following market commentary you’ll have noticed the theme of buying fixed income dominating the narrative. This theme refers to investors and institutions alike calling time on the majority of the hiking cycle and starting to look at locking in high yields across the curve. With many 10-year yields still sitting between 4 and 5 percent within the G10 space, there has been a strong argument that bond prices could begin to moderate. With the decline in global yields several weeks ago, following encouraging inflation data within the US and UK, tilting your book towards owning government bonds seemed justifiable at worst. However, with everyone talking about the attraction of owning fixed income, a significant slide within bond prices is creating a stress in the forecast and in FX rates also.
Bond yields globally have seemed to move against the current remaining stubbornly high despite a significant shift in narrative. Strong bond auctions within primary offerings have seen yields in many primary markets set recent record lows. If bond yields do not fall again in line with many analyst and fund manager calls, a forced sale of souring positions could spike yields higher in the short run and raise volatility across the spectrum. Within the FX space most spreads within key swap tenors have remained liquid and tight but the market has seen all too recently how quickly these spreads can deteriorate.
Looking at the week ahead, testimony from Jay Powell on Friday will be a key point for the market. How downward pressure on the Yuan is managed by the PBoC will also be key to controlling any volatility outbreaks. With light volumes dominating most markets, there is a risk of sudden price movements creating cross asset volatility. For Sterling watchers, PMI data on Wednesday will be the focal point of the week to seek clues on how the Bank of England may play its hand.
Discussion and Analysis by Charles Porter
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