Andrzej Skiba, Head of BlueBay U.S. Fixed Income, discusses how the year has begun with a bond market sell-off.
Watch time: 4 minutes, 14 seconds
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Welcome to the latest edition of The Weekly Fix. My name is Andrzej Skiba.
Before we go any further, we’d like to express sympathy to the victims of the California wildfires that continue to impact so many communities. We also feel immense gratitude for the work of first responders, putting their lives at risk, while dealing with the calamity.
Turning attention back to the markets, we’ve seen an aggressive sell-off in Treasury prices with 30-year yields briefly touching 5%. We’ve indicated for some time that we see this level as a likely scenario, however the speed at which markets got there surprised us somewhat. We anticipated that investors might want to see first specific details of the Trump administration agenda, however, it seems that a few stronger than expected data releases coupled with a growing consensus regarding the need for term premia to rise in the face of heavy deficit funding is all it took to hit 5%. The market is now pricing one 2025 rate cut this year, quite a departure from the 2-3 expected only a few weeks ago.
Spread markets responded to the weak price action in Treasury markets with a shrug. Investment Grade spreads are marginally wider despite record January issuance, while High Yield is actually tighter in spread terms year-to-date. We note, however, that back in 2022, spread markets also initially ignored price action in rate markets. However, that only lasted for a while with plenty of spread volatility ensuing.
We’re often asked whether it’s time to add exposure to fixed income assets. We would prefer to wait for Trump administration policy details and understand the Fed’s response to the new policy mix before unwinding our underweight duration bias. To go overweight, we’d need to gain comfort that the Trump policy agenda is more benign than expected, especially when it comes to potential trade escalation ahead.
From a spread perspective, we’re running much lighter exposure across the strategies we manage, having booked profits on a variety of holdings in late 2024. With spreads close to cycle tights, we see no rush to re-establish a forceful overweight and still prefer to hide in short duration securities with superior carry and breakeven characteristics. As an example, across credit and securitized markets we see many 2-3 year bonds in 6-7% yield context that fit this profile. If spreads widen considerably over the weeks to come, we have plenty of firepower to take advantage of any dislocations.
Eventually, we expect the dust to settle and material demand for longer duration fixed income assets to return. Despite tariff-induced pressure on the consumer, we expect growth outlook to remain positive, helped by lower taxes and de-regulation. We also note that corporate balance sheets are in a good shape, default outlook is benign and credit maturity walls have been largely addressed. These are the reasons why we don’t advocate for an exit from US fixed income, favoring short duration bias and re-engaging with assets further out the curve at better entry points as the year progresses.
Thank you for your attention.
Summary points
The year began with an aggressive sell-off in Treasury prices as 30-year yields touched 5%.
We’ve seen this as a likely scenario, however, we got there rather quickly.
Spread markets barely responded, but history tells us that spread volatility tends to follow price action in the rates markets.
We maintain our short bias, preferring to wait for Trump administration policy details and to understand the Fed’s response before moving further out the yield curve.