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- High current coupons and levels of carry on high quality corporate debt are enticing to investors.
- Recent positive developments on the US macroeconomic front are driving demand.
- The market is also supported by the expectation of rate cuts next year, but there are risks to that projection.
Hello and welcome back to the Weekly Fix, my name is Stephen Fitzsimmons, Institutional Portfolio Manager on the BlueBay US Fixed Income team at RBC GAM here in Stamford, Connecticut.
According to Bloomberg, at the end of last week, 90% of new US high grade bonds issued over the course of the week traded tighter in secondary markets. The week prior, we saw 100% of US high grade bonds issued during the week trading tighter in the secondary. In terms of upcoming issuance, we expect to see another 15 to 20 billion this week, with issuance front-loaded toward Monday.
What does this mean to us? Clearly, there continues to be robust investor demand for high quality paper in the primary and secondary markets in the corporate bond space. High current coupons and levels of carry are enticing investors back into the market. We believe jubilation related to recent positive developments on the US macroeconomic front is helping drive this demand. Additionally, market participants seem to be indicating that we will start to see the Fed easing financial conditions in the US by-way of rate cuts over the course of 2024… another potential tailwind to the space.
Although we agree recent CPI prints, retail sales and last week’s strong GDP numbers come together to paint a picture that a soft landing in 2024 is probable, there are of course always risks to the downside. If the labor market fails to exhibit resiliency and if inflation remains super sticky – it could be hard for the Fed to cut rates materially and this may negatively impact growth through 2024.
As such, we remain ever vigilant in largely avoiding deeply cyclical names in our portfolios in this environment, as well as names that do not have pricing power in the face of rising costs.
Soft landing or hard, we believe the market environment in 2024 will be one that benefits active asset management and credit selection. With where rates are and the various technical tailwinds to the space we see currently, we remain very excited about fixed income in this active context.
As always, thank you so much for your time, happy holidays, and good luck trading.