02 MAY 2022
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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