Rate markets – The US vs The RoW.
We believe more 2021 US stimulus will cause Treasuries to continue widening gradually. In the US,10-year rates have widened by c.25bp year-to-date, compared to most other developed economies which have seen a widening of between 5-15bp, with some exceptions. In emerging markets, most eastern European economies have widened between 10-20bp, however several EMs, such as Mexico and South Africa are still falling behind.
Inflation – Savings vs Stimulus.
Regarding US inflation, more stimulus and income growth will mean some inflation. 30-50% of the stimulus will likely focus on income-supporting measures and on top of this, US savings rates are at 12% vs 8% pre-COVID. It is still early to assess how much and how fast this money may be spent and to what extent it would lead to higher inflation. However, US inflation-swaps are pricing inflation in 1 year to around 2% and there are early signs that US inflation may exceed that.
High Yield has become low yield.
Both US and European high yield bond markets are trading close to all-time tights in spreads. current US HY spreads are 110bp below their 10-year averages, trading at c.325bp versus the 10-year average spread of 435bp. Similarly, EU HY spreads are also c.85bp below their 10-year averages, trading at 299bp vs the 385bp 10-year average. Further, in the current yield-desert environment, theUS HY bond market currently yields at an all-time low of around 3.9% in dollars versus the long-term average of 6.4%. In Europe, the HY market yields at around 2.5% in euros versus the long-term average of 4.6%.
However, single-name and sector spread dispersion remains high, providing fertile ground for alpha opportunities and active management which dominate beta strategies. Hence, in this environment we continue to invest in credit in selected cyclical sectors linked to economic reopening, offering robust carry at yields of 3-7%, and in convertible debt, which offers higher upside than pure credit. Further, we maintain our cash exposure, offering downside optionality at relatively limited opportunity cost.
To read more on our latest views, please see our Silver Bullet | Brave New World or visit our Insights section.
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