Fixed Income Highlights
- Divergence in Divergence. Declining U.S. growth and rising European growth in the first quarter looks less like divergence and more like convergence. U.S. rates fell from their early March peaks while European rates bounced off of their QE-induced "negativity" prompting U.S. rates to follow suit at the end of April. Looking forward the U.S. data cycle looks to turn upwards, and with rising European rates undermining the "low global yield" consensus, we look for modest pressure for higher rates. Risk assets appear far too complacent to such an inflection point, leading us to upgrade our caution over the next few months.
- Mind the Basis … and a New Source of Euro Sovereign Supply. Rising costs of currency hedging undermine the U.S. yield advantage. The recent ECB lending survey indicates a rising supply of euro debt as banks plan to reduce their holdings. Combined with higher yields at the end of April and better European economic prospects, it suggests the turn in European rates may have been reached.
- The Final Stage in the "Five Stages of Greece." Greece is moving towards the final stage of the "Five Stages of Greece," our long-running theme best describing the emotional character of the Greek drama. As Greece looks to potentially run out of money this month, "acceptance" either of the eurozone conditions or of the consequences of an exit brings us to the final stage of this long-running saga. The decision hinges on political rather than economic rationale, as the essential contradiction proposed by Greek political leaders that they can stay in the eurozone while avoiding its requirements appears about to be put to the test. While global investors will watch with interest, the facts and circumstances today argue for far less financial market significance than in prior episodes.