‘Peak’ U.S. Inflation Signal Eyed for Bond Market Turning Point

(Bloomberg) — Bond markets could be in for something of a rebound after their record plummet, with investors looking for signs that U.S. inflationary pressures have touched their peak.

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Global bonds have racked up a record straight nine months of losses, with April being the worst ever, according to data stretching back to 1990. But fund managers are already pointing to signs of a change in the inflation and economic growth outlook that could help boost market sentiment.

Data this week are likely to show that U.S. consumer prices rose 8% from a year earlier in April, according to Bloomberg economists including Anna Wong. That would make it likely that March’s 8.5% increase was the high for the current cycle, they wrote in a report on Friday.

“If we are seeing the peak in inflation then maybe we have also seen the peak in pricing central bank reaction functions and more aggressiveness and maybe we get more moderation in our losses” in bonds and equities, said Stefanie Holtze-Jen, APAC CIO of Deutsche Bank International Private Bank in a Bloomberg Television interview. “So light at the end of the tunnel may be this week.”

Still, with U.S. employment data for last month posting strong gains, the Federal Reserve is unlikely to drop its hawkish rhetoric for now, and that may weigh particularly on credit given risks for the economy. The slowest export growth in China since June 2020 in April highlights supply-chain disruptions from Covid lockdowns that will likely continue to put upward pressure on consumer prices.

Concerns about runaway inflation have hastened central banks into action, with the Fed hiking interest rates by 50 basis points last week and flagging more such moves in coming months. Funds with a fixed-income focus suffered their biggest outflows since April 2020 last week, according to EPFR data.

The yield on the five-year U.S. Treasury rose to 3.1% on Monday, its highest since 2008. Investors at this point are finding it hard to hide in any asset classes and risks abound including falling demand in China and spikes in energy prices.

“There’s so much downside risk and so many adverse economic conditions at the moment that are really hitting financial market sentiment,” said Katrina Ell, Senior Economist at Moody’s Analytics. “China’s zero-Covid policy is having a huge and deep economic impact. It’s really putting a cap on China’s economic recovery.”

Spreads on Asian high-grade dollar bonds widened three to five basis points earlier on Monday amid light trading with Hong Kong on a holiday, according to a trader. That puts them on track for their highest since late-March at just over 150 basis points, according to a Bloomberg index.

Read also: BlackRock’s Rieder Says Buy Investment-Grade Credit, Patiently

Elsewhere in credit markets:

Asia

The Asia primary dollar bond market was quiet on Monday with Hong Kong out, though Export-Import Bank of Korea is considering a possible euro note sale.

Goldman Sachs Group Inc. credit analysts see opportunities to add to 7-10 year Chinese A rated corporates notes, in particular the technology, media and telecommunications sector after recent underperformance and the steepening of the credit curve, according to a report dated May 7
Japanese machinery manufacturer Kubota Corp. plans to sell as much as 150 billion yen ($1.1 billion) of bonds

Americas

Huntington Bancshares Inc./Huntington National Bank sold bonds in the U.S. high-grade market on Friday.

Evidence is building that some borrowers in the U.S. leveraged-loan market are having a tougher time drumming up demand for new deals
- Wireless services company Syniverse Holdings LLC and electric equipment maker AZZ Inc. were both forced to make prices on their loans more favorable to get investors to buy in on Friday. Restoration Hardware Inc. halved the size of its deal on Thursday and offered the biggest discount seen in the new-issue market since February
Canyon Partners executives Jonathan Heller and Sergey Kamensky have left the debt and real estate investment firm after more than 13 years, according to an investor letter seen by Bloomberg
For deal updates, click here for the New Issue Monitor
For more, click here for the Credit Daybook Americas

EMEA

Europe’s primary market may bounce back this week with a planned European Union NextGenerationEU deal, though sentiment remains under pressure amid a fragile market.

Last week saw market issuance of under 15 billion euros ($15.8 billion), the third lowest weekly tally so far this year; a total of 19% of market participants expect this week’s sales to exceed 30 billion euros, according to a survey conducted by Bloomberg News on May 6
One of the few profitable sovereign-bond trades is a bet on an IMF bailout for a handful of countries whose debt is selling at distressed levels