A relatively quiet start to the week ended with Friday bringing back some much needed volatility to asset markets on the back of continued hawkish Fed rhetoric, the ECB’s policy inaction disappointing markets and expectations that the BoJ will not move to ease further. The VIX (volatility) Index spiked to its highest level since June as the Standard and Poor’s Index fell 2.45% on the day. Commodity prices also came under pressure; Brent crude plummeted ~4% on Friday but was still up on the week. The Treasury market sold-off having traded within tight range for over a month, with the curve steepening; 10-year yields ended the week 7bps higher at 1.68% while the 30-years were up 12bps. Meanwhile 10-year Bund yields peaked above 0% for the first time since mid-July.
Boston Fed head and known dove Rosengren’s comments tilted markets on Friday as the voter claimed he believes there is a 'reasonable case' to be made for a rate hike as the labour market continues to 'gradually tighten' while inflation is ‘slowly returning' to the Fed's 2% target. The central bank members remain split however, with Fed Governor Tarullo saying he would like to see more evidence of sustained inflation before considering raising rates, adding however that he wouldn’t foreclose a possibility of a hike this year. Despite its relatively stronger performance on Friday, the dollar (DXY) Index was still down 0.53% on the week, while the offshore renminbi was only marginally lower.
Our positions in high quality quasi-sovereign holdings remained resilient last week; state-owned gas producer, Gazprom’s 8.625% 2034 tightened a couple of bps to yield a still very attractive 5.85% while Abu Dhabi’s sovereign wealth fund’s IPIC 6.875% 2041 rallied a point. As central bank policy continues to dominate fickle markets, we look to maintain our portfolio’s exposure at the long-end of the curve while keeping the higher weighted average credit rating at single A. Our portfolios continue to offer an attractive yield between 3.5-4% with an average 3 credit notch cushion. Volatility brings opportunity which we endeavour to switch into, from positions which have outperformed.