Trending with Institutional Investors
Global Macro
The articles on this page reveal the topics that are receiving the most traffic from investors inside RFPnetworksTerminal, within one sub-asset class.
Each article summarises the key themes that investors are researching based on their engagement with content and or their search queries for that topic. These can be early signals of portfolio changes or new searches.
Why Is The ECB Not Raising Interest Rates Faster?
What Is The Logic
The ECB is raising rates, but many argue not fast enough. The ECB's is counter argument is that they are doing what is necessary, only differently.
The last weeks brought lots of interest rate surprises from Central Banks. Here were the main talking points:
U.S. Federal Reserve (The FED): The U.S. Federal Reserve increased its benchmark federal funds rate by 75 basis points to a range of 1.5% to 1.75%. More notably, this was the largest interest rate hike since 1994.
Bank Of England (The BoE): The Bank of England raised its policy rate by 25 basis points. More notably, this was a a split-decision with three of the nine-member committee arguing for 50 basis points - despite this being the fifth interest rate hike in a row.
Swiss National Bank (The SNB): The Swiss National Bank surprised almost everyone by increasing interest rates by 50 basis points. More notably, this is their first increase in interest rates in 15 years.
European Central Bank (The ECB): And whilst the ECB has signalled that it will increase rates by 25 basis points in its July meeting (and possibly 50 basis points in September), the market feels this is not enough. And more notably, out of line with other core central banks.
Adding to the FED, BOE and SNB interest rate hikes above, the Bank of Canada has already embarked on multiple rate hikes. And the Reserve Bank of Australia surprised markets earlier in June with their own 50 basis point interest rate hike. And further afield in Emerging Markets, Egypt surprised markets with 2x expected 200 basis point rate hike to 11.25%. And in South Africa, the South African Reserve Bank (SARB) increased interest rates by 50 basis points to 4.75%.
The European Central Bank has not followed other Central Banks in their more aggressive path of rate rises, or surprises. Instead, the ECB has surprised the market with the announcement last week of the preparation of a new anti-fragmentation tool, and a more flexible reinvestment policy as part of the Pandemic emergency purchase program (PEPP). In other words, they are tackling bond market tensions and peripheral spread widening differently.
But what does this all mean for Fixed Income Investment Manager Selectors? And Asset Manager Sales, Marketing and RFP teams?
High Yield: The ICE Bank of America High Yield Index broke the 8% yield level for only the 6th time since 2008. Prompting institutional investors in many countries to revisit the asset class research on the topic in the Fixed Income feed within RFPnetworks PRO Site.
Municipal Bonds: The Bloomberg Barclays Municipal Index dropped -2.27% last week. This is interesting as Municipal Bond Research & Outlook papers have been trending for several weeks in the RFPnetworks PRO Site. Given that this is the biggest weekly drop since April 2020, at these levels, we now may start to see some new RFP's for Municipal Bonds.
Investment Grade Credit and MBS: In Corporate Credit, the new issuance backlog has increased as supply hit zero last week for the first time this year. And the risk premium on newly originated mortgages versus treasuries have seen spreads double, to levels not seen since 2012, with the primary mortgage rate at its highest since 2008.
In 2015, when we saw this level of traffic in the RFPnetworks PRO Site Fixed Income Research Feed, a wave of High Yield and Loan RFP's followed. Watch this space.
Global Macro
We see danger ahead. Markets are still too high, and protection is expensive in an increasingly nervous world; common sense suggests one should invest conservatively, and in safe assets. In a world where people find themselves without the ability to pay commitments as they arise, forced selling drives prices. Among risky assets like equities, one of the counter-intuitive things in a liquidity crisis is that securities perceived as safest and most liquid go down sharply, because investors are forced to sell what they can, not what they want to. We therefore regard plentiful liquidity in the portfolio as overwhelmingly attractive; it allows us to make the most of the opportunities that arise in the aftermath of a crisis. But first we have to get through the storm.
The thought that central bankers can do much to change the broad sweep of inflation is, in my view, far-fetched. Lowering interest rates and keeping them down ensured that, in the aftermath of the 2008 crash, the world escaped a dislocative deflationary recession, and experienced instead a reprieve from deflation. Their actions, however, had an inevitable consequence: the onset of a virulent inflation. This was perfectly predictable at the time, and, indeed, we predicted it.
There was, however, no money to be made from the insight that money had lost stability post-2008 – the car would swerve maybe towards deflation, maybe towards inflation, but the final result would certainly be inflationary, because the authorities’ obsession was (and is) to avoid deflation. The game changer was to be rightly prepared for inflation, and for the last ten years, we have been. To call it too early is, in our book, to call it on time.
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