Fixed Income Monthly Report - October 2022
Preview of our monthly publication with single bond ideas
Every month, we publish the Fixed Income Monthly report. The report is a synthesis of the Ashenden’s team view on Fixed Income, pursuing a global approach through the full spectrum of the asset class and providing bond picks. We range from Investment Grade bonds to High Yields & Emerging Markets.
In the report we disclose our bond model portfolio (6 years track record) with more than 60 individual names. We include new single bond ideas, switches, new entries and exits.
All this is corroborated by a bottom-up analysis for each single position (new and old) and merged with a top-down consideration so to include the key market drivers.
This is one of the research piece our team produces internally. The intent of the report is to support wealth managers/asset managers in their decision and allocation process.
In the report, you will find an summary of the main events of the month and an analysis of the macro context.
In the latest version (October), we talked about:
Macro overview: the long streak of quarterly losses continues
The Q3 2022 saw global markets under pressure again as investors reacted to both the growing likelihood of higher interest rate and an increased risk of a broad global recession. After a strong rally in equity and bond markets in July, both asset classes sold off in August and September, leading to developed market equities falling about 6% over the quarter. In particular, US stocks have notched their longest streak of quarterly losses since the market collapse of 2008: the S&P 500 ended the quarter down 5.3% and the Nasdaq was down 4.1%.
The English “Whatever it takes” and the UK financial stability
Bank of England intervened to save treasuries by temporarily buying long dated Gilts to prevent a meltdown in pension funds and ensure financial stability. UK Gilt markets and the GBP saw a sudden collapse and experienced one of the strongest moves in history, which sparked margin calls for pension funds using derivatives to hedge risk. This caused a liquidity crisis for these institutions and hedge funds, that have roughly GBP 1tr invested in Gilts and other bonds. This episode highlights the risk of high inflation and interest-rate increases for the modern financial system. The violent exit from the “low for longer” rates environment put at risk strategies funded on it. This creates the risk for other eruptions and particular attention should be obviously paid to the US Federal Reserve. On the other hand, this creates opportunities for investors that are cash rich.
Credit Suisse on the verge of collapse?
Credit Suisse has now a market cap close to US$ 10bn, with the decline accelerating on Sept 21st following headlines about the potential capital increase. See the full Substack article here
Fed not pivoting soon
Led by the US Federal Reserve, there has been a concerted drive to higher interest rates in the developed economies as the central banks respond to an increased inflation level. We expect more Fed rate hikes but the pace may decelerate due to slowing growth and increasingly unstable global financial conditions. But this is not going to happen so soon, as we are in the middle of a strong hiking cycle and macro data, in particular inflation and job market, are still proving to be strong. We certainly have to look beyond this year. We believe a U-turn from the Fed is a naive expectation and we see investors are positioned too early for this to happen. They risk being disappointed. This creates the basis for further market volatility and investors uneasiness.
Credit overview: spreads will widen more
On the rates structure we did not see much changes and our view is still the same. The more the Fed hikes, the more the curve should invert. Short-term Treasury yields could continue to move up, but upside is likely limited with long-term Treasury yields. Investment grade corporate bonds appear attractive and we suggest moving up in credit quality. The same cannot not be ruled out for High Yields bonds. We continue to suggest caution on this segment there will be better entry points next year. We have a similar view for Emerging Market bonds.
Next, we updated our monthly model portfolio, studying its performance and adding new bond ideas:
New ideas
Ideas reiterated and business case updates
Exits
The fixed income model portfolio includes Investment Grade and High Yield bonds.
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