The Daily Update - FOMC and negative yields

Last night’s FOMC minutes took a cautious approach to any further monetary easing noting that most participants viewed the cut as ‘part of a recalibration’ or ‘mid-cycle adjustment’ and cautioned that it should not be seen as part of a ‘pre-set course’ of further easing although the Fed will remain flexible and assess incoming information. While a couple of participants preferred a 50bps cut there were also several participants who favoured ‘maintaining the same rate’. Thus, the minutes offered little for the doves and continued to frustrate and drive Trump to twitter again overnight as he continues to see a Fed falling short of his suggested of 100bps of cuts over a ‘fairly short period of time… with perhaps some quantitative easing as well’.

However, the minutes reflect the Fed’s thinking ahead of Trump’s latest round of tariff escalation in August hence the market focus is now on Powell’s commentary at the Jackson Hole gathering. The markets continue to look for further easing and 2-10 year UST curve briefly inverted again.

Elsewhere, Germany’s 30 year bond issue at a yield of -0.11% failed to raise the targeted €2bn instead garnering only €824m of demand.  Given the strong gains in fixed income markets a bit of investor apathy to chase the rally is perhaps warranted: now the entire German bund curve is trading at a negative yield and offers even less in real yield terms (July German CPI was 1.7% yoy). On a global basis, USD16.4tn in debt is trading at negative yields but a weakening global growth outlook and a US administration still set on a hard-line protectionist trade policy the trend if anything looks likely to continue.

As the search for yield continues we continue to favour positioning in areas such as the GCC region which offers high quality credits on positive yields while benefiting from greater investor awareness and index inclusion. Within our universe of USD denominated Eurobonds we see the greatest value amongst the quasi-sovereign issuers, for example Abu Dhabi Crude Oil Pipeline 4.6% 2047 trades on a yield of 3.14% is rated AA by both S&P and Fitch and trades ~3.6 credit notches cheap on our models.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.