Market Views

GLOBAL CREDIT BULLETS | Monday, 22nd March 2021

Fed – Words are not enough anymore.
At the well-anticipated March meeting, the Fed failed to reassure investors about the selloff in the bond market. While both inflation projections and dots suggest now no hike until 2023, the dovish calm that followed the meeting lasted less than one day, with US 10y yields now 10bp higher than before the meeting. US inflation will temporarily touch 3% in April, and will remain elevated for the second part of 2021. Data, from the job market to retail sales, show bullish signals as the US leads the vaccination effort. The market remains thus skeptical about the ability of the Fed to maintain a very dovish stance, and every dip in rates is an opportunity to hedge. The next important level is 2% in US 10y, where real yields would touch 0% and some buyers may temporarily trigger some tightening.

Euro rates – Time to follow suit?
As US rates are getting all the attention, EU rates start becoming less attractive. After the move in US 10y yields, European investors get a much higher yield holding Treasuries and hedging FX, vis-a-vis holding bunds. Investor demand for bunds is thus likely to start becoming more tepid. As long as the ECB maintains a more dovish attitude, Euro rates will probably remain more supported. The strong valuation gap, however, suggests that a less dovish commentary or a catch-up in European vaccination rates has the potential to trigger a strong re-pricing. We believe this move is not in the cards immediately, but a “bund tantrum” may follow suit as we enter summer.

Vaccine rollout – Europe is lagging behind.
Europe’s vaccination rollout continues to lag behind that of the US and UK as, initially, vaccination efforts stalled due to supply constraints and logistical issues. This led to a ‘third wave’, forcing most European countries into a tightening of restrictions and lockdowns. However, there is light at the end of the tunnel, as vaccination speed has been growing in Europe, albeit slowly. Covid cases are already dropping significantly in vaccination leaders Israel, US and UK. The UK accelerated its vaccination rollout further, with almost 40% of the population having received at least one dose, while it is 24% in the US and 60% in Israel – a level that should suffice for herd immunity.  For all countries lagging behind, the summer months will allow some breathing space, which should result into an ease of restrictions by the end of Q2.

Turkey – Yet another storm.
Over the weekend, the Turkey administration has removed the Central Bank of Turkey (CBT) Governor Naci Agbal. The move follows a large interest rate hike deliberated by the CBT last Thursday. The new Governor (Sahap Kavcioglu) is a vocal proponent of lower interest rates. Mr Agbal had taken office in early November, with a clear mandate to fight inflation and FX instability and to replenish FX reserves. The changeover is thus a clear negative, as the CBT started a stark U-turn in November, which markets have interpreted as a concrete sign of change, and rewarded with fresh capital inflows. The sudden change means a likely return to the bad old habits of financial repression and easy policy at the expense of financial stability. Turkish assets have been severely hit on Monday morning (the Turkish lira has lost 9% since Friday closed). We suspect more weakness may be in order in the coming few weeks. Next to watch will be the first decisions of the new CBT Governor and any reshuffle at the Finance Ministry.

To read more on our latest views, please see our Silver Bullet | A World Without Safe Havens or visit our Insights section.

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