Mini Budget, Maxi Vol: Stay Cautious in the Front End of the Curve
The US Federal Reserve (Fed) remained hawkish at its last meeting, hiking as expected by 75bps. Despite the wild swings in many bond markets on the back of the UK turmoil, inflation pressures remain. GDP was revised upward in the US and Core PCE readings were firmer than expected. Meanwhile, a weaker GBP, large moves across the curve, and a Euro HICP print at 9.5% all point toward more tightening and volatility in bond markets. Higher yields and low rate sensitivity in the front end may be the new alternative. TINA is dead; short-dated bonds could be an alternative.
As expressed in a previous Strategy Espresso, we continue to believe we are still in the first stage of a three-pronged policy cycle that could be summarised as follows: upside surprises on inflation still fuel the debate on 50bps versus 75bps hikes and focus on inflation. It could be called, “raise at all costs.” For now, the lagged effects of policy tightening are slow to appear, even if some signs of weakening inflation start to appear in certain numbers.
Once peak inflation is past (hoping it’s a when and not an if), phase two will show a Fed more sensitive to signs of a slowing economy; however, it may be too early to call for the end of the policy cycle until it decelerates toward the 2% target. Indeed, if Non-Farm Payroll numbers this week are expected to slow (surveys point to 250k versus 315k in early September), as well as average hourly earnings ticking down 0.1% from 5.2% to 5.1%, this still paints a tight market forcing the Fed to stay on an aggressive tightening path.
The last part of the cycle is when rate hikes are fully complete. Based on current market expectations we are still 100-125bps away from this. Meanwhile, the Bank of England and the European Central Bank still have 375bps and 225bps of tightening to do, respectively, over the next year (based on the difference between the current rate and the one-year forward). The next move will depend on how aggressive the Fed has been and how painful it is for the economy. And the risks appear skewed to the downside. Volatility could break balanced models and generate further situations like the mini budget in the UK, while also reducing the willingness of politicians to counterbalance monetary tightening with fiscal promises without a clear funding strategy.
Most segments of the bond market have posted negative returns in local currency terms in 2022, except T-Bills (+0.63% in USD terms) and Chinese government bonds (+3.03% in CNY terms).1 While many of the hikes are already well in the price (see Figure 1), inflation keeps surprising to the upside and the strong real dollar puts pressure on other markets. Performance during the past month is clearly a reminder of the drivers of fixed income instruments: duration and spread. Staying in the short end can help alleviate big performance swings; for example, 0-3 year corporate investment grade indices fell around 1% to 1.2% in September.
Figure 2: Yield and Duration for Investment Grade Corporate Indices
Duration rules – less sensitivity without losing too much yield
Hawkish rhetoric is doing its job of containing inflation expectations and, with the significant amounts of tightening that have already been delivered still to feed through into the economy, the turn in the rate cycle could occur quite quickly. Short-duration government and investment grade corporate funds would give investors some exposure to the turn in the rates cycle when it does occur (unlike cash).
Front-end valuations have already been hit hard and the front end of the curve already prices a significant degree of tightening. If this tightening proves overly aggressive, then there will be scope for the front end of the curve to rally. Given the wild ride that markets have undergone in the past few weeks, it may take a moderating of inflation pressures and of central bank rhetoric before market participants have the courage to take on meaningful amounts of duration risk.
Figure 3: Yield and Duration for Investment Grade Corporate Indices
How to play the theme
Investors looking to implement the themes described above can do so with SPDR ETFs. To learn more about these ETFs, and to view full performance histories, please click on the links below to visit the fund pages.
1 Source: State Street Global Advisors, Bloomberg Finance L.P., as of 30 September 2022. Past performance is not a reliable indicator of future results.
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For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.F: +49 (0)89-55878-440.
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IL EST POSSIBLE QUE LES SPDR ETF DE SSGA NE VOUS SOIENT PAS DISPONIBLES OU NE VOUS CONVIENNENT PAS. LES OPINIONS/INFORMATIONS PRÉSENTÉES SUR CE SITE NE SAURAIENT CONSTITUER UN CONSEIL EN INVESTISSEMENT OU UN CONSEIL D’ORDRE FINANCIER, JURIDIQUE, RÉGLEMENTAIRE, COMPTABLE OU FISCAL. EN CAS DE DOUTE, DEMANDEZ L'AVIS D'UN CONSEILLER INDÉPENDANT. LES INFORMATIONS ET OPINIONS PRÉSENTÉES SUR CE SITE NE SAURAIENT CONSTITUER UNE SOLLICITATION OU UNE OFFRE D’ACHAT OU DE VENTE DE PARTS DES FONDS OU DE TOUT AUTRE INSTRUMENT FINANCIER.
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Informations relatives au Mexique
Les informations figurant dans ce document ne constituent en aucun cas une offre de titres financiers et ne sauraient être considérées comme telles. Les Fonds mentionnés dans ce document ne sont et ne seront pas agréés en vertu de la Mexican Securities Market Law (Ley del Mercado de Valores). Ils ne peuvent faire l’objet d’aucune offre publique, pas plus qu’ils ne peuvent être vendus sur le territoire des États-Unis d’Amérique. Il est interdit de distribuer publiquement les documents informatifs liés aux fonds susmentionnés sur le territoire du Mexique, tout comme il est interdit d’y échanger des parts des Fonds.
OPCVM SPDR ETFs
SPDR ETFs Europe I Plc et SSGA SPDR ETFs Europe II Plc émettent les ETF SPDR et sont une société d’investissement à capital variable et à compartiments assortis d’une responsabilité séparée. La Société est structurée comme un Organisme de placement collectif en valeurs mobilières (OPCVM) conformément à la législation irlandaise et agréée en qualité d’OPCVM par la Banque centrale d’Irlande.
Ce site web s'adresse uniquement aux investisseurs qualifiés, tels que définis par l'article 10 (3) et (3ter), de la loi suisse sur les placements collectifs de capitaux (« LPCC ») et son ordonnance d'application. Certains fonds peuvent ne pas être enregistrés pour la distribution publique auprès de l'Autorité fédérale de surveillance des marchés financiers (FINMA), qui agit en tant qu'autorité de surveillance en matière de fonds de placement, ou peuvent ne pas avoir désigné de représentant et d'agent payeur suisse. Pour les fonds qui ont désigné un représentant et un agent payeur, les investisseurs intéressés peuvent obtenir les prospectus, les statuts, les DICI ainsi que les derniers rapports annuels ou semestriels disponibles gratuitement auprès du représentant et agent payeur suisse, State Street Bank International GmbH, Munich, succursale de Zurich, Beethovenstrasse 19, 8027 Zurich, ou sur le site https://www.ssga.com, ainsi qu’auprès du distributeur principal en Suisse, State Street Global Advisors AG (« SSGA AG »), Beethovenstrasse 19, 8027 Zurich. Pour les fonds qui n'ont pas désigné de représentant ni d'agent payeur en Suisse, veuillez noter que les fonds sont ouverts aux investisseurs qualifiés, à l'exclusion des investisseurs qualifiés bénéficiant d'une clause d'exclusion (« opting-out ») conformément à l'art. 5(1) de la loi fédérale suisse sur les services financiers (« FinSA ») et sans aucune relation de gestion de portefeuille ou de conseil avec un intermédiaire financier conformément à l'article 10(3ter) de la LPCC (« Investisseurs Qualifiés Exclus »). Pour obtenir plus d'informations et les documents relatifs au fonds, veuillez contacter SSGA AG.
Vous devez vous procurer et lire le prospectus et le document d'information clé pour l'investisseur (DICI) de SPDR avant d’investir. Ils sont disponibles en cliquant ici. Ceux-ci comprennent des informations complémentaires concernant les fonds SPDR, y compris des informations relatives aux coûts, aux risques et où les fonds sont autorisés à la vente.
ETFs SPDR américains
La distribution des intérêts des ETF SPDR américains en Suisse sera exclusivement faite à des investisseurs qualifiés et s'adressera uniquement à ceux-ci, tels que définis par l'article 10(3) et (3ter), de la loi suisse sur les placements collectifs de capitaux (« LPCC ») et son ordonnance d'application. Par conséquent, les ETF SPDR américains ne sont pas enregistrés pour une distribution publique auprès de l'Autorité fédérale de surveillance des marchés financiers (« FINMA »). Certains fonds peuvent ne pas avoir désigné de représentant et d'agent payeur suisse. Pour les fonds avec un représentant et un agent payeur suisse, les investisseurs intéressés peuvent obtenir les documents juridiques liés aux ETFs SPDR américains gratuitement auprès du représentant et agent payeur suisse, State Street Bank International GmbH, Munich, succursale de Zurich, Beethovenstrasse 19, 8027 Zurich, ou sur le site https://www.ssga.com, ainsi qu’auprès du distributeur principal en Suisse, State Street Global Advisors AG (« SSGA AG »), Beethovenstrasse 19, 8027 Zurich. Pour les fonds sans représentant ni agent payeur suisse, veuillez noter que les fonds sont ouverts aux investisseurs qualifiés, à l'exclusion des investisseurs qualifiés ayant une clause d’exclusion (« opting-out ») conformément à l'art. 5(1) de la loi fédérale suisse sur les services financiers (« FinSA ») et sans relation de gestion de portefeuille ou de conseil avec un intermédiaire financier conformément à l'article 10 (3ter) de la LPCC (« Investisseurs Qualifiés Exclus »). Pour obtenir plus d'informations et les documents relatifs au fonds, veuillez contacter SSGA AG.
Avant d’investir, il convient d’analyser les objectifs d’investissement, les risques, les frais et les dépenses des fonds. Pour obtenir un prospectus contenant ces informations et d'autres, téléchargez le ici ou adressez-vous à votre conseiller financier. Lisez-le attentivement avant d'investir.