A week to take a breather is ahead of us. After the market's view of interest rates and inflation has changed significantly in the last two weeks, both in terms of level and length, this week should be characterized by consolidation. On the data side, this week should offer the perfect window for issuers who have already adapted to the new "interest rate pricing" or who want to take advantage of what we see as attractive spread levels and solid investor interest in the market. According to leading indicators, the market is likely to start on a friendly note today.
Last week, strong sentiment indicators fuelled interest rate fears, not without reason, which further increased the pressure on yields on European and US government bonds. So far, the European credit market remained unimpressed and yield considerations seem to have the upper hand over spread considerations for investors at the moment. European inflation data is likely to be the focus of market attention this week. We expect slightly lower inflation figures for the Euro area and little new impulses for the markets. The solid issuance environment should continue in the upcoming trading week.
The much-anticipated US inflation data is now out, but its interpretation seems divergent. While short-dated USTs widened significantly, we saw a mixed picture in risky asset classes with only slight daily changes. The markets seemed divided and about 50% of the market participants now expect further Fed rate hikes into June. Otherwise, the markets followed the patterns of the last few days — an active primary market with solid investor interest on the one hand. On the other hand, government bonds remain under pressure on the secondary market, while EUR credits continue their sideways movement. Sentiment indicators point to a neutral market start today.
Strong start to the year 2023 for ESG bonds on both the primary and secondary markets. Additional tailwind is currently coming from the ECB, which is now considering and implementing further measures to "green" its own bond portfolio and at the same time encourages other market participants to follow suit. In total, the primary market share of ESG bonds increased significantly in 2023 — the role of corporate bonds seems to be outstanding here, where already more than 40% of the issues are ESG bonds. Also, two of the most exciting issues were (Italian) corporate bonds and one of them very successfully tapped a whole new investor base. All in all, it can be said that the ESG segment has obviously left behind their weak phase in 2022.
The lessons from last week are that both the Fed and the ECB in particular have a credibility problem in the markets. As much as Ms Lagarde "made an effort" in her press conference to emphasize that the ECB is "far from" finished with its fight against inflation, the markets interpreted it in the opposite way. This imbalance between the central bank's rhetoric and what investors read between the lines could remain with us for some time. But the US labor market data, which came in well above expectations, impressively showed how fragile the current market (yield) rally is. Over the weekend, a (Chinese) hot air balloon was added as an additional uncertainty factor, which further clouds the diplomatic relations between China and the USA with currently still completely unpredictable effects — this could also be the biggest market driver this week. Otherwise, we would have expected a positive market environment in this week, which now seems to be significantly clouded for the time being.