Given the truce struck in Osaka between Donald Trump and Xi Jinping on June 29, you might expect generalized consternation about matters related to China to have abated this month.
But, according to the 121 investors polled by BofA for the latest edition of the bank’s US credit investor survey, China worries in one form or another are still front and center. Specifically, “Trade war”, “Geopolitical risk” and “China” take the top three slots on the “biggest concerns” list, making the July survey almost identical to the May installment.
Although the handshake deal between Trump and Xi forestalls further escalations, there’s no timeline for removing existing tariffs and tensions are expected to simmer indefinitely. Still, 85% of those surveyed believe a deal will be struck “eventually”.
(BofA)
The survey was conducted from July 8 to July 11, a time period during which multiple media reports suggested little in the way of progress had been made between the two sides since Osaka. That may account for some of the jitters.
Or, it could be that with central banks set to embark on another all-out easing push and plunging risk-free yields across the globe creating an extremely bullish technical for IG credit and anything that offers any semblance of yield, there’s not much else to worry about right now for this particular set of market participants.
“Sovereign bond yields moved higher this week, particularly Bund yields, but as our Rates colleagues argue, there are too many factors advocating for lower global rates”, SocGen’s credit team wrote Friday, adding that “lower for longer [and an] intensifying hunt for yield means that IG credit will remain well bid”. They were talking about the € credit market, which is distorted beyond recognition (e.g., some high yield bonds are now negative-yielding), but you get the point. Here’s a handy “lay of the land” snapshot from Goldman:
(Goldman)
Still, US credit investors did express elevated levels of concern (versus BofA’s May survey) about recession, deflation, asset bubbles and a prospective currency war. The reason for that should be obvious, and it’s all related. The global manufacturing slump, subdued inflation, rampant uncertainty around trade and the sheer length of the expansion in the US, have prompted central banks to resort to more easing, which in turn raises the risk of asset bubbles, while competitive easing is just a currency war by another name.
Respondents see the probability of a recession in the next 12 months at 20% (from 17% previously) and overwhelmingly see a rate cut as the Fed’s next move.
(BofA)
BofA also notes that “IG investors have responded to the collapse in yields and dovish shifts by the Fed and the ECB by extending out the maturity curve [while] both IG and HY investors are positioned defensively via significant increases in cash holdings”, presumably affording them plenty of “dry powder” to deploy and raising the odds that the spread rally can continue.
Still, high yield investors are now the most bearish looking out a year since before the crisis.
(BofA)
