The Weekly Fix

BlueBay Institutional Portfolio Manager Stephen Fitzsimmons discusses how investors are eagerly buying up new debt issuance.  While many investors appreciated the dovish commentary last week, not all data are cooperating.  

• The past months have certainly been a sustained busy period for the new issue market.
• Strong investor demand has helped drive credit spreads tighter.
• Chairman Powell was decidedly dovish at the FOMC last week… driving yields lower.
• The economic calendar is full this week and investors markets are bracing for the latest inflation measures.

Stephen Fitzsimmons, Institutional Portfolio Manager on the BlueBay U.S. Fixed Income team discusses how investors were largely disappointed with the recent CPI reading, what we’re looking for in some key economic data releases this week, and how it might affect our positioning. 

• CPI came in hotter than market participants hoped and this drove yields higher across the US Treasury curve.
• The shape of the yield curve indicates that markets expect an economic slowdown, which is not our imminent base-case.
• Economic data in the US is doing little to show signs of slowing.
• We continue to expect that rate cuts will likely be later and potentially fewer than others may be pricing in.

BlueBay Head of US Fixed Income Andrzej Skiba discusses why investors will have to wait for additional evidence regarding a moderating inflation trend before the Fed acts to cut rates. 

• Strong growth, labor markets and inflation running hot are not a combination desired by the Fed.
• In terms of jobs, growth remained robust, but we’ve added fewer jobs than expected.
• Inflation remains sticky, with February readings staying higher, following up January’s strong data.
• We do expect a slowdown to manifest itself and that should help inflation to moderate.

BlueBay Senior Portfolio Manager Tim Leary discusses the factors that have led to higher yields this year and why we’re looking for the market to keep grinding.

Key points:

• Spreads may be tighter, but yields are higher on the year.
• This may peak investor interest and we have seen high fund flows.
• This is likely a function of the market coming back towards the Fed’s path.

BlueBay Institutional Portfolio Manager discusses what we’re looking for in some key economic data releases this week and how it might affect our positioning. 

• It’s a busy week on the economic calendar.
• Signs that the economy is doing better than expected may push rate cuts out further in the future.
• We’re paying special attention to the release of the Producer Consumption Expenditures (PCE) price index to gauge lingering inflation.

BlueBay Head of US Fixed Income Andrzej Skiba discusses how investors are dealing with recent trouble spots within the US commercial real estate issues and how we’re dealing with the turbulence. 

• In our judgement, US commercial real estate (CRE) will be a source of negative headlines in 2024.
• Several banks across the globe with significant US CRE exposure have reported increased provisioning.
• Larger banks (>$150B in assets) have been quick to address the deterioration with collateral revaluations and establishing loss reserves where appropriate.
• Periods of dislocation are ripe with opportunities, however careful credit selection is of paramount importance.

BlueBay Head of US Fixed Income Andrzej Skiba discusses how investors are dealing with strong macro-economic data and heavy treasury issuance.

• The US economy continues to turn out strong results.
• It remains to be seen if softer data paves the way for rate cuts later in the year.
• The market continues to adjust its view on the timing and extent of rate cuts.

Stephen Fitzsimmons discusses how the comments coming out of FOMC meeting this week may well provide insight into the future direction of markets.

• Bond issuance is on a record setting pace in January.
• Compelling total return opportunities exist in fixed income.
• Although the market was early to rally as hard as it did in the end of 2023, the directionality of the rally is the correct one. 
• We look to the Fed meeting this week to provide market insight.

Summary: BlueBay Senior Portfolio Manager Tim Leary explains why bond markets remain

healthy following the retrenchment.

• Bond markets have given back the sharp gains achieved at the end of 2023.
• Technicals are quite strong and the market remains liquid and healthy.
• On the floating rate side of the coin, leveraged loan activity is robust.

In this week’s episode, hear Andrzej Skiba explain how expectations need to be reset after the rally to end 2023, but that opportunities abound.    

Summary points:

• The sharp market rally has investors rethinking future return expectations. Significant rate cuts are priced in.
• When assessing market projections for early rate cuts, we see room for disappointment.
• On average, Investment Grade, High Yield and MBS spreads look uninspiring.
• We see plenty of opportunities to generate alpha in attractively-priced opportunities and dislocated idiosyncratic credit stories.