Radiografía del mercado de renta fija

If a reason to get involved with the Trump rally was a sense that the President-elect would become more presidential the closer we got to inauguration day, then it is not surprising that some investors are having second thoughts. He is proving to be as unpredictable and entertaining as he was during the campaign. So the rally has eased back a little. The good thing is the economy is doing well and macro momentum supports risk assets. The inauguration speech will be a big deal. It could trigger another round of higher bond yields and equities, or it could have investors booking profits and going into hiding.    

•          Have you heard the one about….  –  I read this week of a gathering in Ireland that took place last November and combined economics and comedy in a kind of “Davos with jokes” way. Now we are all aware that economists can be the subject of much humorous derision (ask one question to two economists and you’ll get at least three answers; what do you call an economic forecaster? Wrong) but it is not normally associated with frivolity. After all, economics is often described as the dismal science and practitioners of the subject are generally hubristic and lacking in self-depreciation. There are exceptions. The authors of “Freakonomics” for example, or Andy Haldane describing the collective failure to anticipate the credit crisis as a “Michael Fish” moment ⁽¹⁾. And I must say, over the years, we have had some amusing meetings with a number of City economists. But it has to be said that a paper titled something like “Deviations from general equilibrium: a stochastic approach” is not the ideal form of light relief. The more I thought about it though, the more amused I got by the prospect of debates on the value of forward guidance chaired by someone like Dara Ó Briain. The funnier economics can be made, the more interesting and relevant it may become. I ask you, what is more appealing, a festival of economics and comedy with a plentiful supply of Guinness in Kilkenney, or an ostentatious ego-fest up a Swiss mountain?
•          Seriously?  – If comedy can make economics more bearable, then one might think that President-elect Trump is taking the same approach to politics. Let’s hope everyone “gets” his sense of humour! His first press conference of the year was certainly entertaining, although it contained little substance for investors trying to understand what the economic priorities of the new Administration will be. Like some stand-up comedians seem to thrive on taking on hecklers in the audience, Mr Trump appears to relish picking fights – Meryl Streep, the CIA, the news organization CNN, Obamacare, Mexico (again) and germs. With his Tizer-Tan ⁽²⁾ and habit of parenthesising his comments, if you did not know better one could be forgiven for not taking him altogether seriously. But the reality is that we must and the problem for investors, the closer we get to Trump moving into the White House, is trying to figure out what is showmanship and what is real politics. It is interesting that the Trump rally has run out of steam a little bit over the last couple of weeks. The US stock market has gone sideways, the dollar is off its highs and Treasury yields have fallen 25 basis points (bps) from the highs of late December. I don’t think we are reversing, but I think investors are putting bullishness on hold, at least until there is an opportunity to hear more policy details from the new President. If the inauguration speech reiterates the desire to cut taxes, boost spending and raise the US growth rate, the rally should be back on. If, on the other hand, the occasion is another invective against real and imagined enemies, risk aversion might become a lot more apparent. It could be just a function of the transition from Obama to Trump and how that is being judged in the rest of the world but it does seem that the geo-political risk dial has been turned up somewhat in recent months. How markets respond to the first few days and weeks of the Trump Administration could determine what kind of year 2017 will be for investors.
•          Holding credit – Meanwhile it is all quiet in Europe at the moment. European markets have been dragged higher by the focus on the US while longer term core bond yields are firmly in positive territory. Credit markets are stable with European high yield delivering around 75 bps of return above government bonds in the first two weeks of the year. Generally higher yielding bond assets are outperforming with the lower yielding investment grade market having to absorb a huge amount of corporate issuance so far in January. According to Bloomberg, there has already been some $93bn in US corporate bond (investment grade) issuance in 2017 with a lot of issuance coming from the financial sector but also from sectors like telecom. The European markets have been busy as well, again seeing a lot of financial issuance as well as sovereign and semi-sovereign bonds being sold as borrowers race to get funding done in case global yields do move higher in 2017. With credit spreads around 30% above the lows reached in 2014, it is difficult to see a significant further tightening of spreads in the short term given the technical backdrop of increased supply. Still, I like credit within the bond world because of the additional spread relative to government bonds (+1.29% in US investment grade, +4% in US high yield, +1.24% in European investment grade and 3.7% in European high yield). Higher yield and less duration than equivalent government bonds mean credit is somewhat more defensive when the biggest risk factor in bond markets is the normalisation of interest rates.
•          Keep an eye on positive data  – For all the focus on politics, the fundamentals do still suggest that the rate outlook will dominate what happens in bond markets this year. The data continues to move in a positive direction. This week saw strong reports from the US on small business optimism, job openings and initial jobless claims (the number of continuing claims for state unemployment benefit stood at 2.087m at the end of December – rarely has this measure actually fallen below the 2m level).  The employment report for December also suggested that the labour market is tight with average earnings growth continuing to rise. The 2.9% year-on-year increase in average earnings in December was the highest annual growth rate since 2009 and the acceleration in wage growth since mid-2015 tells us that firms are having to pay higher wages to attract workers. The fact that the monthly increase in non-farm payrolls has trended lower since the beginning of 2015 (3-month average to Dec-16 was 165,000 compared to 275,000 in December 2014) is not a sign of diminishing labour demand but one of diminishing labour supply. Hence the increase in wage costs. Next week we will get the US inflation data for December and the market consensus is for the headline consumer price inflation rate to move above 2%. It last briefly moved above 2% in mid-2014 but was only sustainably above that level in the years prior to the financial crisis. Wages are rising and the spot oil price is 48% higher than a year ago, pointing to another period of inflation above 2.0% for some time to come. The 10-year US break-even inflation risk premium has just reached that level and I am expecting this to move higher in the months ahead as investors seek inflation protection, particularly if we get the bullish Trump inauguration rather than the “pick-a-fight, any fight” version.
•          Macro supports risk-on but careful of value –  There are lots of ways to generate performance in bond portfolios – being in the right bond asset class, having the right level of duration and credit risk, exploiting market dynamics like carry, quality and relative value. A very important one is macro-momentum and a belief that interest rate assets and credit assets react in different ways to the macro outlook is a basic of top-down investing in bond markets. We have found that there are reasonable correlations between the performance of pure interest rate bond assets (core government bonds) and pure credit assets (high yield excess returns) to macroeconomic indicators such as purchasing manager indices. Rates tend to be negatively correlated (i.e. returns from core bonds fall when there is positive macro-momentum) while pure credit returns are positively correlated to macro-momentum. That is the part of the cycle we are in at the moment. Until there is a change in the macro-economic environment and the data starts to weaken, high yield should continue to outperform Treasuries. The thing to watch, of course, is how far this can go and what it means for relative valuations.
•          Legacy  –  President Obama leaves office after 8 years with the S&P500 150% higher than when he made his inauguration speech, the unemployment rate over 2% lower, with 7m more non-farm payroll jobs and, according to the International Monetary Fund, with per-capita GDP some 40% higher than at the end of 2008. The starting point was recession so the progression looks good, but even with that it is hard to knock what has been achieved since then. Taking over an economy at full employment, well advanced in the business cycle with monetary tightening just getting underway is going to be a more challenging job. There is very likely to be some sort of downturn within Trump’s term in office and given where debt levels remain, it could well be a significant one. The big medium term concern revolves around the question – if Trump is this antagonistic globally about trade and defending US interests when the economy is pretty much at full tilt and when equity markets are at record highs, what might he be like when the US enters a recession. One thing is for sure, the dollar won’t be strong forever.
•          It’s all about the North West – It’s United versus Liverpool this weekend. For the first time, the television coverage will make use of a Spidercam to provide a bird’s eye view of the on-pitch action. Can’t wait to see a Zlatan volleyed goal from above. It would have been good to have had such technology for some of the classic games in the past, to have a different view of Vidic dragging down Torres, or Berbatov’s overhead goal, or King Eric’s FA Cup Winning strike at Wembley, or what exactly Suarez said to Evra. It’s always a tough match, one of the biggest rivalries in world football and there is a perch up for grabs in the post-Ferguson era. Mourinho is looking like he could be a worthy successor but to prove that he has to win matches like this. An early walk, a bit of lunch then bring it on.