Recent Non Farm Payrolls were very strong and subsequent University of Michigan inflation expectations were high, forecasts for the next expected 25bp cut have moved from March to June , potentially even further out. Term premium has increased and the US 30 year is heading for 5% (the 20 year is already there). The Dollar continues to strengthen as the US economy maintains significant momentum.

All this as the Tariff man takes office and implements potentially inflationary policies, helping to keep forecasts for where markets go in 2025 as tricky as ever. Chairman Powell is in his post until the middle of next year but that doesn’t stop Trump taking aim at the Federal Reserve and the Vice Chairman for bank supervision, Michael Barr, has already announced he is stepping down; politicisation of the institution looks inevitable. 

The European economy continues to drift with weak growth and political and fiscal uncertainty in its two biggest economies, now subject to foreign interference which appears to favour the far right. German manufacturing continues to decline and their automotive sector is experiencing some seismic shifts. European yields have risen also but are unlikely to derail the ECB from their continued dovish rate cutting plans helped by an easing in the Euro Area labour market.

Gilts have had endured a significant early year move, especially at the long end, as term premium has also increased for UK sovereign risk. Yields have largely followed moves in US Treasuries but the UK has its own set of problems (not least potential for that ugly word, stagflation) and the yield premium between the two sovereign curves has widened. As 30 year Gilts printed yields not seen since the 90’s (reaching 5.45%) commentators rushed to compare the situation to late 2022. However, this is not a liquidity crisis or as a result of forced selling by LDI strategies, more a function of the sheer volume of fundraising needed to come from Gilts to fund deficits. So far there is no lack of demand for UK Sovereign risk (we have seen a widening in UK CDS but only to levels last seen in August) and recent Gilt auctions saw a 5 year 3 times covered and a15 year 14 times covered. There is however precious little more credence for Starmer/Reeves than there was in Truss/Kwarteng and whilst Sterling weakens, yields have been steadily rising (the combination is not a great vote of confidence) since the Budget, making the BoE’s job even harder.

The outperformance of credit versus rates has been stark. Sterling credit, in particular, has been strong, underpinned by high demand and limited supply. The start of this year has been busy in the primary market despite the rates volatility and corporate bond sales in the first week broke records in $ and EUR.

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