Investors remain wary of the USD/JPY exchange rate after signs of interventions by Japanese authorities this week as the U.S.-Japanese interest rate differential keeps the yen exposed to further weakness. Bond investors also contemplate what prospects of the Federal Reserve leaving interest rates high for a prolonged period could mean for government bond yields. The following is a selection of recent asset manager comments.
Investors Could Shun Riskier Credit as U.S. Interest Rates Stay Higher
1002 GMT - With U.S. interest rates likely to stay higher for longer, credit investors are likely to remain cautious about investing in vulnerable segments of the corporate bond market, BlackRock head of macro credit research Amanda Lynam and credit research strategist Dominique Bly say in a note. In the absence of significant interest-rate cuts, the credit market is likely to face "distressed exchanges, 'repeat defaulters,' and 'loan only' capital structures." The U.S. Federal Reserve is likely to have fewer interest-rate cuts than markets are pricing in once the process starts, resulting in "high-for-longer" interest rates, the analysts say. (miriam.mukuru@wsj.com)
USD/JPY Could Return to 160; BOJ Should Stop Balance-Sheet Expansion, BlueBay Says
0933 GMT - USD/JPY could still rise back up to 160, once Japanese intervention ends, should the U.S. economy remain upbeat, Mark Dowding, chief investment officer of BlueBay, RBC BlueBay Asset Management, says in a note. This could put the Bank of Japan in a more difficult position, as well as acting as a potential catalyst for additional volatility in global financial markets, he says. Dowding argues that the BOJ should cease balance-sheet expansion as soon as possible. The central bank "needs to adjust its mindset, before it is even more behind the curve and does more damage in the event that the yen continues to move lower," he says. USD/JPY falls 0.4% to 153.027. (emese.bartha@wsj.com)
U.S.-Japanese Rate Differential Is Too Large for Yen to Escape Hit
0702 GMT - The interest-rate differential between the U.S. and Japan is too large to overcome, says James Solloway, chief market strategist and senior portfolio manager at SEI. The yen slid to just beyond 160 per dollar earlier this week, apparently prompting interventions by Japanese authorities. "Either the Fed [Federal Reserve] starts cutting rates...or the Bank of Japan needs to shock the markets with a series of rate increases that pushes yields barely above zero to a level much closer to other developed countries," he says in a note. A rate cut by the Fed isn't likely, though, given the current strength of the U.S. economy. USD/JPY falls 0.3% to 153.279. (emese.bartha@wsj.com)
Volatility Seen Easing in Major Government Bond Markets In Coming Weeks
0644 GMT - Volatility in bond markets might decline in the coming weeks as the Federal Reserve's meeting and the U.S. Treasury's quarterly refunding announcements are now out of the way, Felipe Villarroel, partner in portfolio management at TwentyFour Asset Management says. Lower volatility could allow U.S. Treasurys, Bunds, gilts and other G-7 government bonds to trade sideways until a new catalyst emerges, he says in a note. "After an 80 basis points selloff in 10-year Treasuries, further outsized moves require a continuous dose of increasingly bad news," he says. The 10-year U.S. Treasury yield is trading 1.5 basis points higher at 4.585%, while the 10-year Bund yield is trading 3 basis points lower at 2.528%, according to Tradeweb. (emese.bartha@wsj.com)
Bond Investors Could Still Consider U.S. Recession Scenario
0631 GMT - Investors may wish to consider lengthening out the duration of their bond portfolios as the recession risks haven't fully gone in the U.S., BeiChen Lin, investment strategist at Russell Investments, says in a note. "While the word 'recession' may have slipped from the market's vocabulary, we don't think recession risks have fully abated," he says, still seeing a 35% probability of a recession in the U.S. over the next 12 months. "If the U.S. economy tips into a recession, the Fed [Federal Reserve] would need to respond by aggressively cutting interest rates, which would benefit bondholders," he says. (emese.bartha@wsj.com)
Equities Look Favorable Relative to Investment-Grade Bonds
1407 GMT - Equities are more attractive due to a positive outlook for earnings and growth, while investment-grade bonds look less attractive due to uncertainty about the likely timing of interest-rate cuts, Claudio Wewel, forex strategist at asset management firm J. Safra Sarasin says in a note. Bonds' performance has been negatively impacted by the lack of clarity on when the U.S. Federal Reserve will start rate cuts, Wewel says. "We have increased equities and reduced investment grade bonds [in our portfolio," he says. "The geopolitical situation has stabilised and growth prospects, along with the earnings outlook remain robust and hardly show signs of weakness." (miriam.mukuru@wsj.com)
Fed's QT Decision Could Help Accommodate High Treasury Supply
1041 GMT - The Federal Reserve's decision to lower the cap on Treasury reinvestments from June will be supportive for the market to absorb this year's higher bond supply, Paolo Zanghieri, senior economist at Generali Investments, says in a note. Quantitative tightening will slow down markedly starting next month, with the cap on Treasury reinvestment reduced to $25 billion per month from $60 billion, while the cap on mortgage-backed securities, or MBSs, will be kept at $35 billion. "In this way the Fed speeds out the reshuffling of its balance sheet towards Treasuries and will be able to help accommodate the higher bond supply expected for this year," the economist says. (emese.bartha@wsj.com)
European Bank M&A Is Positive For Bank Credit Investors
1256 GMT - The rise in mergers and acquisitions among European banks should be beneficial for bank credit investors due to stronger profitability and valuations, Jakub Lichwa, portfolio manager at asset management company TwentyFour says in a note. The acquisition of smaller banks lowers the vulnerabilities in the banking sector and strengthens the sector's stability. "The latest transactions have come from a position of strength, rather than weakness," Lichwa says. (miriam.mukuru@wsj.com)
(END) Dow Jones Newswires
May 03, 2024 08:04 ET (12:04 GMT)
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