Middle East Tensions Keep Energy Markets on Edge

The latest tactic is to demand compensation from each other, the net effect being that the Strait of Hormuz remains closed. Trump has also threatened to bomb Oman, the reality of what he can achieve in the region remains unclear although he now apparently has posted that he regards the area as ‘new US territory’.

Rising Sovereign Debt Burdens Drive Long-Term Yields Higher

Back at home US long-dated yields have climbed, as they have in Japan, Europe and the UK, to multi-decade highs amid continuing worries about fiscal deficits, inflation and general geopolitical instability. The US Treasury is clearly concerned about borrowing costs across the curve and signalled that it would increase buybacks in the 10 – 30 year area which had the effect of pushing down yields, but only for a couple of days before this was unwound. They remain the owners of a $40Trillion debt problem, 126% of GDP.

In other areas of borrowing the plans of hyperscalers remain vast. Most of what has been issued continues to trade very poorly in the secondary market despite offering some generous spreads, although investor appetite, for now, is unabated. The wider system is now involved as Nvidia is seeking a $500bn financing arrangement from a consortium of leading Wall Street names to build out their AI infrastructure.

Eurozone inflation increased as CPI rose to 2.9% and it looks inevitable that the ECB will hike again by another 25bp in September. The Eurozone economy has withstood elevated energy prices rather more robustly than feared and continues to print some healthy, if not spectacular, GDP and PMI numbers.

The UK economy has also withstood these factors better than anticipated even amidst a period of political turmoil. Burnham has big plans to spend money he doesn’t have (to be fair that’s no different to most other British PMs) but without tackling our spiralling welfare bill. Half of new Chancellor Healey’s ‘headroom’ has been wiped out by the rise in Gilt yields. The BoE remains on hold although three members voted for a hike.

Credit Markets Remain Resilient Despite Mounting Risks

Credit spreads have remained remarkably resilient throughout this period. USD issuance has been high, Euro issuance steady, but precious li ttle has come out in Sterling. At the risk of repeating myself, the all in yields available at the short to medium end are highly attractive.
 

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