With the economics manual in hand, what has been happening in the fixed income market in recent months could be explained simply by relating it to the rise in interest rates that the large central banks have had to accelerate to counteract the advance of inflation. However, not everything can be explained on this basis, since some movements are being seen that do not respond to the most orthodox theory.
One of these is what is happening with the shortest tranches of sovereign debt, which are clearly trading very strong short-term uncertainty around the possibility of an economic recession. In this sense, the best example is the US yield curve, which has not been so inverted since the 1980s. The difference in yield points already exceeds 90 points between the maturities of 2 and 10 years.
“Inflation is reaccelerating in some cases and in others at least it doesn’t seem to be falling at the rates we expect; the economy is holding out but it may die of success as central banks are forced to raise rates more and more to curb inflation. economy and thus cool prices”, point out from Altair Finance Asset Management. “We see it very clearly when we look at the inverted interest rate curve at the highs of the 1990s, short-term rates are rising very fast and the risk-return ratio is starting to pose problems for the rest of the assets, although for now the bags hold up and the speech is favourable”, they add.
The consequence of this is that the profitability of short-term debt has not only surprised to the longest tranches but to other types of fixed income assets such as corporate debt. In this case, it has already slightly outperformed the projected return for the highest quality (Aaa) US credit. And it approaches the following steps of credit quality.
“Credit markets now appear to offer the best return/risk as investment grade approaches its highest levels since the financial crisis as opposed to government bonds where the yield curve is inverted,” explains Chris Iggo, from Axa IM.