US

A couple of weeks ago we wrote about Treasuries breaking new ground and the potential for them to go higher as higher inflation expectations gathered pace.

Our end of year view on the 10 year is 1.50, but we could get there a lot quicker - now is not the time to be brave on Treasuries.

We think it is indeed time to begin the search for recovery stories and deleveraging credits in sectors where the execution strategy is likely to succeed.

We think this current pause in the global rally is healthy and gives investors a rare moment to reassess, but from a fixed income credit point of view we would not expect too much of a dip.

While we enter 2021 with plenty of negative headline news on the virus, along with the associated inevitable downgrade or delay to the economic recovery, in our view the technical position remains just as firm as it has been in the last nine months.

Regular readers will know that we have a positive medium term view of spread products. This is based on a number of factors; valuations in our view are reasonably attractive compared to history, we are convinced that both monetary and fiscal stimulus will remain in place for an extended period of time, and perhaps most importantly we remain at a very early stage of the new cycle.

In this short video, TwentyFour CEO Mark Holman outlines what he expects to see from bond markets in the next few weeks, and explains why he thinks fiscal stimulus in the US can be the catalyst for the rally to resume in the medium term.

With September set to be the first negative month for most risk asset markets since March, it is worth analysing what has been driving the reversal.

The tweak that we will read so much about with respect to the inflation goal is that the new policy can be viewed as a “flexible form of inflation targeting”, meaning that following periods when inflation has been running below 2pc, appropriate monetary policy will likely aim to achieve inflation moderately above 2pc for some time.

Earlier this week, Moody’s published its default study for June, which showed that as expected, default rates globally have started to pick up as a result of COVID-19. The trailing 12-month global high yield default rate reached 5.4% at the end of June, up from 4.8% in May, as the gap to the long term average of 4.1% continues to grow.

As we enter Q2 earnings season, we will be most interested to learn how Corporate America has fared over the past three months.

After the most incredible first quarter of 2020, we have seen an almost equally incredible second quarter. It is clear to us that the market overreacted in March, but it has also overreacted in its interpretation of the recovery.