Fed Credibility Increases: Rates Markets Price In Higher Likelihood For Narrow Path To Controlling Inflation Without Creating A Recession

The inversion of the US forward OIS curve has faded to a substantial extent, led by a sharp increase in 5Y-forward 3M rates, with the front end of the curve pretty stable and more fully priced

Recent Changes Of 3-Month USD OIS Forward Rates | Sources: ϕpost, Refinitiv data


Significant Widening In US High Yield Spreads This Week, In Line With Weak Equities Performance, As US Economy Clearly Slowing Down

Reasonable volumes of new USD corporate bonds this week (IFR Markets data): US$27.7bn in 35 tranches for IG (2022 YTD volume $494.6bn vs 2021 YTD $480.4bn), US$6.5bn in 11 tranches for HY (2022 YTD volume $48.2bn vs 2021 YTD $164.9bn)

High Yield 5Y CDS Indices Europe vs North America | Sources: ϕpost, Refinitiv data


The Euro Continued To Fall This Week, With The War In Ukraine And The Risk Of A Russian Nat Gas Ban Now Putting The EU On The Edge Of A Recession

Euro options positioning is skewed to the downside with the first round of the French presidential elections now upon us; a win by Le Pen would push the spot further down towards 1.0500 with a widening of the OATs-Bunds spreads (and a likely spillover into BTPs)

Euro & EUR-USD 12X18 Forward Rates Differential | Source: Refinitiv


Repricing Of Forward Rates Higher Was The Main Development This Week, With 3M USD OIS 4 Years Forward Up Nearly 50bp, Leading To Curve Steepening

On the sell side, Goldman Sachs contends that "expeditiously" might mean 4 x 50bp hikes until the Fed reaches its neutral rate, although the GS base case is still for 2x50bp followed by 4x25bp this year, and 3x25bp next year

3-Month USD OIS Forward Rates | Sources: ϕpost, Refinitiv data


US$ Spreads Tighten Slightly On Friday, With A Decent OAS Compression For The Week Of 9bp In IG And 11bp In HY

Strong end to the quarter for investment grade corporate bond issuance, ahead of the earnings quiet period (IFR Markets data): 44 tranches for $35.8bn in IG (2022 1Q volume $466.9bn vs 2021 1Q US$459.6bn) and 5 tranches for $1.96bn in HY (2022 1Q volume $40.1bn vs 2021 1Q $152.4bn)

iBOXX USD Liquid Bonds Total Returns | Sources: ϕpost, Refinitiv data


Equities Finished The Week On A Less Volatile Note, With Total US Market Capitalization Edging Back Above $50 Trillion

Looking at the top- and bottom-performing countries year-to-date, it's still very much about commodities and inflation, with exporters doing well (with the exception of Russia) and big importers doing badly

Equities Year To Date Total Returns By Country | Sources: ϕpost, Refinitiv data


Broad Fall Across The Commodities Complex, With All GSCI Sub-Indices Ending The Week In Red

Most of the big recent gainers (crude oil, nickel, wheat, etc.) had a decent selloff and the skew in their implied volatilities dropped back to less extreme levels

Wheat 1-Month 10-Delta Call Implied Volatility | Source: Refinitiv


Lack Of Additional Sanctions Against Russia Leads To A Return Of Risk Appetite, With EM Currencies The Main Beneficiaries

Rates differentials continue to push the yen lower, as the BoJ keeps buying JGBs to maintain control of the curve, with no sign yet that the central bank is worried about importing inflation with a weak currency

Japanese yen spot rate vs US-JP 18X21 forward rates differential | Source: Refinitiv


US Treasuries 2s10s Spread Inverted This Week, With The Rise In Front-End Cash Yields Met By Additional Rate Cuts Priced Into Forwards

USD LIBOR-OIS basis spreads tightened this week as tensions in funding markets calmed down significantly, but the USD OIS curve now prices in close to 4 rate cuts of 25bp between 2023 and 2025 (a growing forward reversal of the current hiking cycle)

Eurodollar EDZ25-EDU23 Spread and USD 3-month OIS 42X45 - 18x21 forward spread | Source: Refinitiv

Cross Asset

Spring Break: We're Taking A Little Time Off And Will Be Back Next Week

The market is now pricing in close to 9 hikes this year (2.25% by end of December), and with a slew of Fed speakers coming up later this week, it will be interesting to see how they position the May hike and the announcement of QT (which was initially supposed to count as one hike)

Hikes priced (in basis points) for May and December 2022 | Source: Refinitiv


US Equities End The Week With A Strong Rebound, Led By Technology And Consumer Discretionary Stocks

Commodities-focused emerging markets are clocking the best performances (US$ total returns) year-to-date, with Chile up 18%, Brazil up 17%, and Saudi Arabia up nearly 16%

S&P 100 Market Caps ($m) | Sources: ϕpost, FactSet data


Not A Ton Of Movement On Friday, With US Credit Spreads Just Slightly Tighter Into The Weekend

Weekly total US$ corporate bond issuance (IFR Markets data): IG saw 32 tranches for a total of $28.6bn (2022 YTD volume $392.2bn vs 2021 YTD $404.8bn) and HY 2 tranches for $1bn (2022 YTD volume $35.4bn vs 2021 YTD $93.8bn)

Goodyear Tire & Avis Budget 5Y USD CDS Mid Spreads  | Source: Refinitiv