Part 1 : toward a reduction in the Fed’s support, the ECB’s continuation
After the sharp rise in yields seen between August 2020 and March 2021, long yields gave back some of their increase until July, before stabilizing (Chart 8). The announcement of tapering by the Fed, which was widely communicated in advance and disconnected from the issue of rising yields, failed to have a significant impact on the bond markets.
Central banks have maintained their monetary support with an increase of nearly $500 billion in their balance sheets over the past two months (Chart 9). The Fed’s purchases accounted for nearly half of this amount. Their gradual reduction would imply the maintenance of significant amounts of purchases.
In Europe, the ECB’s action will continue to limit the risk of spread slippage. Although some hawkish voices (favorable to a more restrictive monetary policy) are against this, the PEPP program is likely to be fully used. If inflation remains low, a new program is possible.
The timing of the increase in key rates according to the markets remains roughly identical to the expectations of the last quarter (end 2022, early 2023), but the market has lowered the final point of the next cycle of monetary policy normalization, which is weighing on long yields.
However, long-term market inflation expectations remain in the region that has prevailed since 2015. As a result, the recent downward movement in yields has mainly occurred along real rates, with new all-time lows (Chart 10).
Part 2 : credit: Tight but still attractive spreads in a low interest rate environment
Spreads are stable at low levels, in line with a favorable business environment, liquidity, and the corporate financial situation (Chart 11). Over the next few months, this situation is likely to continue, but we will need to monitor the developments mentioned above. Bank lending conditions continue to ease, which provides support for corporate credit.
Against this backdrop, the lack of major changes in market rates should enable High Yield to offer a performance close to carry, which is still attractive in the bond universe. Subordinated financial debt is also one of the most attractive assets in the bond market because the default risk associated with bank loans is partly absorbed by the public authorities.
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The opinion expressed above is dated September 2021 and is liable to change. Latest available data as of publication date.
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