Earnings Call, Interview, Webinar
Global Rates & FX Views: Global bond selloff & credit impact
Bank of AmericaSphia Salim, Ralf Preusser, Meghan Swiber, Neha Khoda, Barnaby Martin, Zviya Salim, Megan Zweiber
- Investors attribute 70% of the global long-end rate move since June to improving growth expectations, a rise from 30% in September, with fiscal consolidation viewed as the sole credible option to stabilize rates while support for shortening duration delivery has declined to zero.
- The Bank of America strategy team projects shortening the weighted average maturity of issuance could alleviate pressure on the back end of the curve, whereas the team expects shortening duration delivery to the market will not help.
- Megan Zweiber anticipates that financial conditions must tighten and activity data must slow to balance inflation risk, noting that without a household balance sheet turnaround, equity or credit markets must signal further tightening.
- A more aggressive Federal Reserve than currently priced in is expected to dampen the long-end sell-off, while CTA positioning is viewed as the clearest catalyst for a rally, with a potential 10 basis point front-end rise likely to trigger short covering.
- Banks are not expected to purchase long-dated debt due to asset manager aversion to the long end, while active fixed income managers are anticipated to close duration underweights and move toward neutral positions relative to benchmarks.
- The Treasury survey scheduled for next Friday at noon may signal an intent to cut long-end supply, though the market could interpret supply cuts as a signal that the Treasury is becoming less predictable, potentially demanding higher compensation.
- IG spreads are projected to trade in a 75 to 85 basis point range and high-yield spreads in a 275 to 325 basis point range, with high-yield spreads expected to remain at the 10th percentile of post-global financial crisis levels despite recent widening.
- Investment Grade issuance is forecast to increase year-on-year by approximately 30%, while high-yield loan supply is expected to decrease year-on-year by a range of minus 5% to minus 10%, alongside a similar pace of hyperscaler issuance next year.
- The path of least resistance for credit spreads is expected to move tighter unless rate volatility remains unchecked, with European spreads currently viewed as rich and vulnerable to further selling if rates do not fall.
- European credit markets are expected to be resilient to 4% bond yields only if an AI-driven profit revolution is realized, as a lack of profit growth could cause interest coverage for sectors like single A to fall to all-time lows.
- The "corporate is safer than sovereign" theme is expected to persist due to government cash constraints but may reverse if special or windfall taxes force sovereign deleveraging and corporate re-leveraging.
- Forward EPS expectations are anticipated to rise parabolically with 40% global profit growth over the next three years, driving market sentiment despite a lack of current evidence of margin increases outside the technology sector.
- Hyperscaler supply fears are considered materially lower now than in September, with investors currently attributing the long-end sell-off to improved growth expectations rather than supply, shifting attribution from 30% to 10%.
- Credit markets require certainty regarding the direction of rates to maintain spread containment, with the team expecting rates to fall before an obvious entry point for credit appears.
- Equity markets are expected to take a major hit only if 10-year Treasury yields reach 7%, while the team holds positions favoring long exposure on asset swaps, 20-year on-the-run assets, and 20-year asset swaps.
- The team lacks near-term conviction that household balance sheets will turn, suggesting greater signs from equities or credit markets are required to validate financial conditions tightening.
- Recent credit spread widening is viewed as a required minor correction driven by volatility rather than fundamental deterioration, with the market pricing in scenarios involving both Treasury supply cuts and no cuts.