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Weekly Comment | Fixed Income

Inflation may have peaked – but not central bank hawkishness, longer-term bond yields have declined moderately as central banks fight for credibility as long as longer-term inflation expectations have not moved significantly.

Equity-bond correlation to trend lower for now, a small positive for the asset class.

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Weekly Comment | Fixed Income

Lagarde in the July-hike camp causing some volatility – but should not shock markets. This follows the trend that Central Banks front-load rate hikes as long as long-term inflation expectations are still anchored at “relatively low” levels.

If front-loading is the price for credibility, which is difficult to negotiate at this stage, lower rated and growth-sensitive credit segments may underperform while IG may be at an inflection point.

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Monthly Comment | Fixed Income

The month of April has shrugged off any “strong seasonality” argument. Rate hike bets have increased to 4x 50bps so that the Fed may reach the neutral rate as soon as September 2022 (…to reassess the next steps…) while inflation and geopolitical pressures did not abate. Therefore, Global Bond markets have experienced a sharp repricing throughout the month. As written in our “weekly” letter, we recommend staying cautious but reckon that the market might hit “underweight-overhedged” soon.

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Weekly Comment | Fixed Income

The Fed delivered a 50bps rate hike as expected and this week’s CPI print will likely indicate that inflation has peaked. This is not enough for the market right now as the focus moves from “uncertainties in terms of peak level” to “the extent at which inflation can slow”, especially after inflation has infected the service sector, supporting the “permanent camp”.

Powell expects a stable unemployment rate in the range of 3.5% – 4% which would be an “OK” scenario. However, with job openings reaching a new all-time high in March (>11mln in March) and unit labour cost growth accelerating by >7% y/y during the first three months of 2022 the market has a hard time to believe in less inflation pressures coming from the job market.

EUR denominated IG yields have reached Covid-highs and credit spreads price in a recession. So far, the economic sentiment outweighs the under-risked positioning in global portfolios and the corresponding valuations.

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Weekly Comment | Fixed Income

With the 10y UST trading around 2.9% ytm it is roughly 4 standard deviations above its 1y moving average and exactly at the top end of the downtrend which has started in the early 80s. IG credit spreads in EU and the US have widened significantly and already price in a recessionary environment. Is this a combination to buy? – We still recommend a cautious positioning, but the market might hit “underweight – overhedged” soon.

The lack of places to hide puts Global Bonds as an asset class in a heightened competition with the Money Market Asset Class in a world where holding cash may not hurt any longer on a nominal level. As rates and credit provide poor diversification benefits to equities in an Anti-Goldilocks world the “cash allocation” instead of bonds has become the “new diversification”. While it may be too early to call a relief for bonds, we think that the rates/credit vs. equity correlation has peaked and more dispersion within credit is ahead of us.

The Q1 GDP contraction has surprised the market, but it is unlikely to change the Fed’s outlook. The most important component, private domestic demand, has grown at an annualized rate of 3.7%. This is rather strong considering the current inflation rate which erodes some of the purchasing power.

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Weekly Comment | Fixed Income

The Fed is under significant pressure and it is becoming increasingly likely that they will hike in 50bps-steps for the next 3-4 consecutive meetings to reach the “neutral rate” as soon as September. Several Fed members have emphasized a reassessment once the “neutral rate” has been reached.

Credit Spreads have widened as the technical picture continues to weaken and supply has not even started. However, we acknowledge the fact that credit fundamentals look (very) benign. While they may deteriorate moderately throughout 2022 we are convinced that fundamentals continue to support the credit market and act as a “safety net” during the current anti- goldilocks trend.

Given the generically low interest rate duration the Cape Fixed Income Fund is well equipped to perform well relative to most major fixed income segments. We remain on the cautious side and continue to maintain a higher-than-average cash balance but we reckon there is a decent portion of pessimism in terms of slowing growth and hawkish CBs already priced in.

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