Global Fixed Income
US inflation rates continue to decline and are moving closer to the Fed’s 2% target, however, the US labour market continues to soften, with unemployment rising to 4.2% while participation rates remain stable. US GDP growth has remained steady, supported by consumption, investments and government spending, although the strong US dollar may hurt exports.
Current US fiscal policy could pose some risks to long-term yields, with the increasing budget deficit and rising interest expenses still adding pressure. We have yet to see the full impact of sustained tighter fiscal conditions, coupled with the intensifying geopolitical tensions in the Middle East, Ukraine/Russia conflict and the uncertainty regarding the implications of the outcome of the US elections in November.
US treasuries remain attractive when compared to most other assets including equities, Investment Grade (IG) and High-Yield (HY) bonds. Medium-term technical indicators for government bonds remain strong, while long-term trends are close to indicating a potential breakout. Relative momentum is mixed when compared to full duration credit, but weak against HY and equities.
The overall trend for IG credit reflects a broad-based recovery, particularly in the non-commodity sectors, with positive shifts in revenue and earnings before interest, taxes, depreciation and amortisation (EBITDA) signalling an improvement in corporate performance. This helps to underpin the stabilisation of credit metrics and provides support for the current recovery in the credit markets. Despite the ongoing pressures of higher rates, the moderation in interest expense growth and stable leverage ratios indicate that issuers are managing their financial health more effectively amid the higher-rate environment.
Valuations in respect to spreads remain tight (expensive) when compared to history. However, higher yields and corporate positive bond holder friendly actions provide some level of support, with absolute performance remaining strong, but slowing vs. government bonds. Overall supply/demand dynamics remain solid, with recent supply being met by robust demand.
HY credit top line metrics are encouraging, with revenue and EBITDA growth rebounding over the past quarter and profit margins managing to push higher after a period of weakness. With policy rates being eased, the maturity wall has been pushed out further as corporates take advantage of the improved funding conditions. Valuations relative to government bonds remain near record lows and remain expensive vs. IG debt. Sector and security selection remains valuable as pockets of opportunity are available.
Technical dynamics for HY remain solid in both absolute and relative terms across all periods. Issuances remain heavy year to date and have been met by strong demand. We expect issuance of HY credit to be reduced during the second half of 2024 as the market has attracted strong flows from institutional investors seeking higher yields.
During October we lengthened duration with our global fixed income positioning now favouring a more neutral position versus the Bloomberg Global-Aggregate Total Return Index Value Unhedged USD benchmark. Current duration is 6.4 vs 6.5 of the benchmark.