FIXED INCOME ● GLOBAL
4 July 2018Allocation changes 3
Global direction 4
US 7
Eurozone core 8
Eurozone non-core 9
UK 10
Japan 11
Canada 12
Australia 13
New Zealand 14
Inflation-linked 15
Covered Bonds 16
EUR supras & agencies 17
US dollar supras and agencies 18
European Credit 19
US Credit 20
Asia credit 21
EM Direction 22
Latin America 23
CEEMEA 24
Asia 25
Green bonds 26
Currencies 27
DM trades 28
EM trades 32
Forecasts 35
Related trades 37
Disclosure appendix 40
Disclaimer 44
ContentsFIXED INCOME ● GLOBAL
4 July 2018
US: downgrade to neutral. 10-year Treasury yields are at the lower end of our tactical trading
range, so we have turned neutral. We have revised up our two-year T.Note forecasts, but left
the 10-year unchanged at 2.3% which would push the curve flatter towards 10bp by year-end.
Australia: stay mildly bullish. Downside risks to the cyclical sweet spot have pushed yields
towards six-month lows. Tighter AUD funding concerns have now come to the fore, which
should also keep bonds well supported.
Euro non-core: stay neutral. We see limited upside potential for non-core rates, in spite of the
fall in core yields. Shocks from political uncertainty in Italy have stopped the non-core acting as
a safe haven from EM volatility, keeping us cautious for now.
Asia: downgrade to neutral. We have turned more defensive on Asia local rates in markets
with inflation risks, such as India. However, we remain bullish on China rates, and see value in
Korean bonds due to their safe haven characteristics and attractive yield pick-up.
Allocation changes
The US curve continues to
flatten as short yields rise…
…and the impact of tighter
policy is evident in Australia
Table 1. The HSBC Conviction Snapshot: our views on the fixed income asset classes for the coming month
Conviction*Index Yield Returns (%)
1 monthName Duration 2 Jul (%) 1 month (bp) 1 month 3 month Ytd
US Treasury ▼▼ BUSY 6.06 2.73 9 0.34 -0.03 -1.11
Euro core ▲▲ I05760EU 7.67 -0.03 0 0.51 1.42 1.60
Euro non-coreLTITTREU 6.68 1.98 -34 0.81 -4.83 -2.50
UK giltLSG1TRGU 12.18 1.32 7 0.24 0.55 0.39
Japan govtBEPAGA 9.54 0.10 0 0.15 0.09 0.66
Canada govt I05500CA 6.70 2.04 -2 0.58 0.67 0.75
Australia govtBEASGA 6.60 2.41 -8 1.01 1.08 2.11
Global inflationiBoxx inflation 12.38 -0.61 -2 -0.26 -4.30 -2.71
Covered iBoxx Covered 4.78 0.51 -5 0.37 0.22 0.22
Euro SSAiBoxx Sub-sovereigns 6.44 0.75 -3 0.38 0.34 0.16
USD SSAiBoxx Sub-sovereigns 3.65 3.51 8 0.21 -0.16 -0.82
EM Sovereign ▼▼ BEMS 7.35 6.39 32 -0.86 -3.84 -5.55
Euro IG ▼▼ BERC 5.20 1.32 6.05 -0.19 -0.24 -0.66
Euro HY ▼▼ BEUH 3.92 4.02 17.45 -0.26 -1.29 -1.80
US IGBUSC 7.44 4.04 7 -0.23 -1.1 -3.3
US HYBUHY 4.33 6.54 16 0.08 0.88 -0.07
*HSBC FI Research opinion, direction of arrows indicates change of view from previous month
Source: Bloomberg, iBoxx, HSBC
Notes: Bloomberg indices are used, except for inflation, covered bonds and SSAs, which use iBoxx. Germany is used as a proxy for the Eurozone core (BGER) and Italy for
the periphery (BITA). Indices are local currency except for inflation and EM which are US dollar based. Euro corporates, covered bonds and SSAs are euro-denominated.
Notes: Bloomberg indices are used throughout, with the exception of global inflation, covered bonds and SSAs,
which use iBoxx indices. Germany is used as a proxy for the Eurozone core (BGER) and Italy for the region’s
periphery (BITA). The indices are all local currency except for Global inflation and EM sovereign which are both
US dollar based. The Eurozone IG Corporate, HY Corporate, Covered and Sub-Sovereign indices are euro-
denominated.
Neutral
Mildly bullish
Neutral
Neutral
Neutral
Neutral
Mildly bullish
Mildly bearish
Neutral
Neutral
Mildly bullish
Mildly bearish
Mildly bearish
Mildly bearish
Neutral
Neutral
FIXED INCOME ● GLOBAL
4 July 2018Slo-mo credit crunch
We appear to be in the midst of a slow-motion credit crunch. Market participants are typically
looking for validation of a forecast from cyclical data or one-off events but the reality can be
different, something analogous to observing a film in slow motion. Looking back over the last six
months there has been a long series of individual events that could be regarded as symptoms
of the global tightening of financial conditions, largely a function of the policy developments in
the US.
Starting in January the widening of Libor-OIS spreads highlighted tighter dollar liquidity. This
was followed in February by sharp sell-offs in the US stock market, reverse VIX derivative
products and crypto currencies. But this was just the beginning.
In March we highlighted the ‘Triple Whammy’ (13 March 2018) of Fed rate hikes, balance sheet
shrinkage and the rejuvenation of cash as an asset class. We have since been focusing on
what happens ‘As the Anaesthetic Wears Off’ (11 April 2018) and last month (7 June 2018) we
listed the surprise events of May across global markets and the start of a shift towards ‘risk off’
positioning. Then the July Global Economics Quarterly (28 June 2018) identified a ‘Triple shock’
of tightening financial conditions, higher oil prices and risk of a trade war.
The US data may be holding up but the rest of the world appears to be doing less well, evident
from recent PMIs. In China, policy has become more accommodating in response (see page 22)
to the tighter financial conditions and we note that CNY rates appear to be falling towards USD
Global direction
Surprise events, decoupling of growth paths and re-pricing of risky
assets are all related to tighter US policy
We have reduced our Bund yield forecasts to the level currently
indicated by forwards…
…and we draw comfort from the relatively high Bund term premium
Steven Major, CFA Global Head of Fixed Income
Research
HSBC Bank plc
steven.j.major@hsbcib
+44 20 7991 5980
Figure 1. China yields continue to decline
Source: HSBC, Bloomberg
The first half of 2018 has
been packed with surprises
US policy divergence
appears to be at the core of
market volatility
3.31
2.86
2.2
2.4
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
4.2
Jan 18Feb 18Mar 18Apr 18May 18Jun 18Jul 18
5Y
sw
ap
ra
te
(%
)
Crypto
selloff
Inverse VIX
selloff
Turkey
hikes
Italian
electionUS-Russia sanctions
Argentina
IMFIndonesia hikes
NAFTA
negotiations
Ramaphosa
replaces
Zuma
CNY
US-China
tariffs
USD
RRR
cuts。