Global Weekly: Pockets of opportunity in bond markets

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Given nervous equity markets and a decline in leading indicators, especially in Europe, German Bunds and US Treasuries continued to be used as safe havens this week. Ten-year Bund yields are back to 0.5%. This is at the top of the range in which they traded for most of 2017. We expect that leading indicators will turn more positive again, after adjusting to more sustainable levels.

This outlook is based on a positive view regarding economic growth. Yields will then find their way back towards and beyond the levels they touched in mid-February. We therefore continue to be careful regarding our duration policy, i.e., the interest-rate sensitivity of the bond portfolio.

Peripheral government bonds performed well again last week, continuing their strong performance since the Italian election. Although the populists are increasingly taking the lead in government talks, this does not worry bond investors, given the current constructive political and economic environment in Europe.

Corporate credit spreads have grinded higher over the last few weeks and are now trading 25 basis points higher than the low reached in early February. As this low was very tight by various historical standards and given that the ECB is getting closer to announcing an end to its bond buying programme, we do not expect spreads to move back to those levels. Financial markets are in the process of getting back to normal. As such, volatility and credit spread levels are expected to reflect more normal economic circumstances.

The more riskier parts of bond markets, high yield and emerging-markets debt, have not incurred the  losses comparative to what is seen in the corporate bond market. This leads us to believe that  the corporate bond market is turning due to market-specific factors and that it is not signaling an end to the economic cycle.

Uncertainty in stock markets

The week started with lower stock prices, as e-commerce and social media platform stocks declined. But once trade war fears eased, the market recovered towards the levels of last week’s close. The e-commerce sector was hit by US President Donald Trump’s tweets targeting Amazon. He claimed the US Postal Service loses money on each package delivered, the tech giants do not pay enough tax and that they are putting retailers out of business. We regard these tweets more as a way for Trump to give mental support to smaller retailers than as a serious threat for e-commerce.

These tweets came on top of the data breach by Facebook. On Wednesday, Facebook said that more data was shared with Cambridge Analytica than previously reported. History tells us that data breaches have an impact in the short and long term. When eBay had data management issues, its use and advertisement revenues dipped for a quarter before recovering. The longer term impact of potential privacy regulation is more uncertain. Likely next steps could include further protections of data from third-party use and making it easier for users to refuse to allow access to their private data.

In the middle of the week, the US proposed 25% higher tariffs on a list of Chinese imports, including many industrial and electronic parts. This was quickly followed by China proposing an additional 25% tariff on around USD 50 billion of US imports, including soybeans, automobiles, chemicals and aircraft parts. After a first negative reaction, the stock market recovered strongly when representatives of both China and the US emphasised that the plans are still proposals and they are open to trade negotiations and avoiding a trade war.  All of this news flow resulted in a very volatile week for equities.