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.