Government Bonds

Credit metrics, as measured by the rating agencies, continued to improve throughout the first half of this year, with all corners of the globe having comfortably more upgrades than downgrades.

In recent weeks we have talked often about the tightening of lending standards, the possibility of the end of dot plots, and especially the shape of the US yield curve – today’s blog encompasses all three.

Aside from the fact that he is Italian and once served as governor of the Italian central bank there are other reasons why Mario will be concerned at the price action in Italian Government Bonds (BTPs).

After another week of yield curve flattening, we now have the 2s-10s curve in US Treasuries at just 43 basis points.

Having discussed the shape of the yield curve as a recessionary indicator already last week, we would like to elaborate on what other indicators we look at as fixed income investors to determine where we are in the economic cycle, which in turn determines how we position ourselves on the yield curve and whether we look to credit risks or government bond risks.

The rapidly flattening US Treasury yield curve is prompting a lot of questions about the shape of the curve and it being a good predictor of upcoming recession.

As we now are well into the Q1 earnings season we have been debating how the current quarter could well be the best for risk in 2018.

One of the most important considerations for us as bond investors is determining where we are in the economic cycle.

Today marks the start of a very busy week for participants in the US Treasury market.

Our base case for rates markets is a gradual shift higher, but there are reasons to consider why even our forecast is too constructive and the move higher could be more substantial.

Following Monday’s volatility in the rates market and the subsequent “meltdown” in US equities, which saw the Dow Jones falling by more than 1,500 points intraday; yesterday had a more orderly feel to markets, and ultimately the 3 major indices in the US, the Dow Jones, S&P 500 and Nasdaq, are all still in positive territory for the year to date.

Yesterday, 10yr Gilts closed at 1.510%.  Whilst that individual yield level does not sound particularly significant, in a historical context it is possibly one of the most important month end closing levels I have witnessed in more than 25 years in the markets.