High-Yield
Fed policymakers will soon shift their focus toward the strong employment and inflation data and stress that further rate hikes this year are likely. This will stem the rally in risk assets and cap the upside in long-dated yields.
Beyond the ongoing short-term rebound, EM currencies have more downside, and will depreciate by more than is implied by their forward rates on a 6-9 month horizon. This makes us reluctant to recommend buying local currency bonds to absolute-return investors. A new trade: Long Russian/short Malaysian equities. We also reiterate our short MYR/long RUB trade.
The deeply negative momentum in oil prices is fading, setting up the possibility of a counter-trend rebound in global inflation expectations and perhaps even the beaten-up U.S. High-Yield bond market.
Indonesia has been fighting the Impossible Trinity, a battle that cannot be won. The central bank will continue printing rupiahs and the currency will depreciate further. Eventually rupiah depreciation will push up interbank rates, and Indonesia's credit cycle and economic growth will stumble. Continue shorting the rupiah, underweighting Indonesian stocks and sovereign credit, and shorting long-term (5-year) local government bonds.
The Fed backing off from rate hikes is a necessary but not sufficient step toward putting a floor under global risk assets. Equity market breadth measures are still very weak, suggesting the selloff remains broad-based. The bear market in commodities/EM/China will likely culminate in a credit event. Downgrade Mexican stocks from overweight to neutral within an EM equity portfolio.
Maintain an above-benchmark portfolio duration since, favoring markets with the highest real yields that stand out in a world where 65% of Developed Market government bonds trade with a negative yield.
Spread product performance has been foreshadowing changes in market rate hike expectations since early last year, and the recent bout of weakness means it is probably time for the Fed to temper its hawkishness.
The U.S. corporate re-leveraging cycle is far more advanced than is widely believed. Corporate health looks only mildly better excluding the troubled energy and materials sectors. Mushrooming leverage ratios are not restricted to junk issuers either.
The U.S. corporate re-leveraging cycle is far more advanced than is widely believed. Corporate health looks only mildly better excluding the troubled energy and materials sectors. Mushrooming leverage ratios are not restricted to junk issuers either.
