US

Fixed income investors are well versed in the risks of ‘fallen angels’, investment grade companies whose bonds tumble in value once they are downgraded to high yield.

It was a dramatic night last night as the Fed cut interest rates by 25bps, the first cut since December 2008, along with the premature ending to the balance sheet run off – however markets hardly moved!

The dust is slowly settling after Wednesday’s FOMC rate decision, and more importantly the following press conference where Chairman Jerome Powell literally talked the market down.

“This time next year, Rodney…”

It is that time of year when we traditionally look ahead to the new year and make predictions on the performance of various asset classes, sectors and industries.

There were sharp declines across global risk assets on Tuesday, led by tech stocks but with barely an asset class left unscathed.

A question we have been getting more frequently for from clients in recent weeks concerns US Treasuries, and more specifically how the level of UST issuance (and where along the maturity curve it arrives) will impact yields both in the rates market and further afield in the coming months.

A volatile last couple of weeks have certainly kept fixed income investors fastened firmly in their seats, with comments from Federal Reserve chairman Jerome Powell suggesting US monetary policy was “nowhere near neutrality” sending shock waves through global rates, credit and equity markets.

Having listened carefully to the FOMC news conference last night, the message to us was clear – the Fed is pushing ahead with its normalisation of rates and the gradual shrinking of its balance sheet.

Those of you who have seen or heard one of our presentations will be aware of the significant impact that the FX-basis currently has on our relative value bond selection.

A few weeks ago we wrote about the geopolitical risks helping to keep credit spreads wider in Europe and the UK and keeping a lid on US Treasury yields (Is It Time to Buy the Dip?).

Last year, with credit spreads tightening close to historic levels, it seemed appropriate to us to take a more prudent stance and move to a more balanced portfolio.