US ‘peak’ inflation signal seen for bond market turning point

(Bloomberg Opinion) — Bond markets could experience something of a recovery after their record slump, as investors look for signs that U.S. inflation pressures have peaked.

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Global bonds have racked up a record nine consecutive months of losses, with April being the worst on record, according to data going back to 1990. But fund managers are already signaling signs of a shift in the outlook for inflation and economic growth that could help boost market sentiment.

This week’s data is likely to show US consumer prices rose 8% from a year earlier in April, according to economists at Bloomberg, including Anna Wong. That would make March’s 8.5% rise likely to be the current cycle high, they wrote in a report on Friday.

“If we’re seeing the spike in inflation, then maybe we’ve also seen the spike in pricing of the central bank’s reaction functions and more aggressiveness and maybe we’ve seen more moderation in our losses” in bonds and stocks, he said. Stefanie Holtze-Jen, APAC CIO of Deutsche Bank International Private Bank in a Bloomberg Television interview. “So the light at the end of the tunnel may be this week.”

Still, with last month’s US jobs data posting strong gains, the Fed is unlikely to abandon its hawkish rhetoric for now, and that may particularly weigh on credit due to risks to the economy. . China’s slowest export growth since June 2020 in April highlights supply chain disruptions from Covid lockdowns that are likely to continue to push up consumer prices.

Concerns about runaway inflation have accelerated central bank action, with the Fed raising interest rates by 50 basis points last week and signaling more such moves in coming months. Funds with a fixed income focus suffered their biggest outflows since April 2020 last week, according to EPFR data.

The five-year US Treasury yield rose to 3.1% on Monday, its highest level since 2008. Right now, investors are finding it hard to hide in any asset class and risks abound, including falling demand in China and spikes in energy prices.

“There is so much downside risk and so many adverse economic conditions right now that are really weighing on financial market sentiment,” said Katrina Ell, senior economist at Moody’s Analytics. “China’s zero covid policy is having a huge and profound economic impact. It’s really putting a limit on China’s economic recovery.”

Spreads on high-grade Asian dollar bonds widened three to five basis points on Monday amid light trading with Hong Kong on a holiday, a trader said. That puts them on track for their highest level since late March at just over 150 basis points, according to a Bloomberg index.

Also Read: BlackRock’s Rieder Says Buy Investment-Grade Credit, Be Patient

Elsewhere in the credit markets:

Asia

Asia’s primary dollar bond market was quiet on Monday with Hong Kong out, although the Export-Import Bank of Korea is considering a possible sale of euro notes.

  • Credit analysts at Goldman Sachs Group Inc. see opportunities to add 7-10 year China A-rated corporate notes, particularly the technology, media and telecom sector after recent underperformance and curve steepening of credit, according to a report dated May 7.

  • Japanese machinery maker Kubota Corp. plans to sell bonds worth up to 150 billion yen ($1.1 billion).

Americas

Huntington Bancshares Inc./Huntington National Bank sold high-grade US market bonds on Friday.

  • Evidence is mounting that some borrowers in the US leveraged loan market are having a harder time increasing demand for new deals.

    • Wireless services company Syniverse Holdings LLC and electrical equipment maker AZZ Inc. were forced to price their loans more favorably for investors to buy on Friday. Restoration Hardware Inc. halved the size of its deal on Thursday and offered the biggest discount seen in the new issue market since February.

  • Canyon Partners executives Jonathan Heller and Sergey Kamensky have left the debt and real estate investment firm after more than 13 years, according to an investor letter seen by Bloomberg.

  • For offer updates, click here for the New Issue Monitor

  • For more information, click here for the Credit Daybook Americas

EMEA

Europe’s main market may recover this week with a planned NextGenerationEU deal from the European Union, although sentiment remains under pressure amid a fragile market.

  • Less than 15 billion euros ($15.8 billion) were issued on the market last week, the third lowest weekly figure so far this year; A full 19% of market participants expect this week’s sales to exceed €30 billion, according to a survey conducted by Bloomberg News on May 6.

  • One of the few profitable sovereign bond deals is a bid for an IMF bailout for a handful of countries whose debt is being sold at distress levels.

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