U.S. inflation signal ‘spike’ lurks for bond market turn

(Bloomberg) – Bond markets could experience some rebound from their record tumble as investors look for signs that U.S. inflationary pressures have peaked.

Global bonds have posted nine consecutive months of record losses, with April the worst on record, according to data dating back to 1990. But fund managers are already signaling signs of a change in the outlook for inflation and economic growth that could help to stimulate Market Sentiment.

Data this week is expected to show consumer prices in the United States rose 8% from a year earlier in April, according to Bloomberg economists including Anna Wong. That would make March’s 8.5% increase likely to be the peak of the current cycle, they wrote in a report on Friday.

“If we see the peak of inflation, we may have also seen the peak of central bank reaction functions and more aggressiveness and maybe we get more moderation in our losses” in bonds and shares, said Stefanie Holtze-Jen, APAC CIO of Deutsche Bank International Private Bank in a Bloomberg Television interview. “So light at the end of the tunnel can be this week.”

Still, with last month’s U.S. jobs data showing strong gains, the Federal Reserve is unlikely to back down from its hawkish rhetoric just yet, which could weigh particularly heavily on credit given the risks to the economy. ‘economy. China’s slowest export growth since June 2020 in April highlights supply chain disruptions from Covid lockdowns that will likely continue to put upward pressure on consumer prices.

Worries over runaway inflation prompted central banks to act, with the Fed raising interest rates by 50 basis points last week and signaling other similar moves in the months ahead. Fixed-income-focused funds suffered their biggest outflows since April 2020 last week, according to data from EPFR.

The five-year U.S. Treasury yield rose to 3.1% on Monday, its highest since 2008. Investors find it at this point hard to hide across all asset classes and risks abound, including falling demand in China and spikes in energy prices.

“There are so many downside risks and so many adverse economic conditions right now that are really affecting financial market sentiment,” said Katrina Ell, senior economist at Moody’s Analytics. “China’s Zero Covid Policy has a huge and profound economic impact. This really puts a ceiling on China’s economic recovery.

Spreads on high-quality Asian dollar bonds widened three to five basis points earlier on Monday amid light trading with Hong Kong on a public holiday, according to a trader. That puts them on track to hit their highest level since late March at just over 150 basis points, according to a Bloomberg index.

Elsewhere in credit markets:

Asia

Asia’s primary dollar bond market was quiet on Monday with the absence of Hong Kong, although the Export-Import Bank of Korea is considering a possible sale of euro notes.

  • According to a report dated May 7, credit analysts at Goldman Sachs Group Inc. see opportunities to add 7 to 10-year A-rated Chinese corporate bonds, particularly in the technology, media and technology sector. telecommunications after the recent underperformance and the steepening of the credit curve.
  • Japanese machine manufacturer Kubota Corp. plans to sell up to 150 billion yen ($1.1 billion) of bonds

Americas

On Friday, Huntington Bancshares Inc./Huntington National Bank sold bonds in the high-quality US market.

  • There is growing evidence that some borrowers in the US leveraged loan market are finding it harder to stimulate demand for new transactions
    • Wireless services company Syniverse Holdings LLC and electrical equipment maker AZZ Inc. were both forced to make their loan prices more favorable to entice investors to buy on Friday. On Thursday, Restoration Hardware Inc. halved the size of its deal and offered the biggest discount seen in the new issue market since February

  • Canyon Partners executives Jonathan Heller and Sergey Kamensky have left the debt and real estate investment firm after more than 13 years, according to a letter to investors seen by Bloomberg
  • For deals updates, click here for the New Issue Monitor
  • To learn more, click here for Credit Daybook Americas

EMEA

The European primary market could rebound this week with an expected deal with European Union NextGenerationEU, although sentiment remains under pressure in a fragile market.

  • Last week market issues of less than 15 billion euros ($15.8 billion) were issued, the third lowest weekly tally so far this year; a total of 19% of market participants expect sales this week to exceed 30 billion euros, according to a survey conducted by Bloomberg News on May 6
  • One of the few profitable sovereign bond transactions is a bet on an IMF bailout for a handful of countries whose debt is selling at distressed levels

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