As primary-market issuance faces difficulties, secondary-market supply has plunged and spreads have begun to tighten. BofA favors highly rated floating-rate CLO tranches, while noting that falling loan prices are eroding protection for junior debt and cash distributions to equity.
Morgan Stanley believes Democratic victories in both chambers of Congress and the Texas gubernatorial election will increase data center permitting risks in some regions, but will not interrupt the overall AI capital spending cycle; fiscal and debt ceiling negotiations will also become a market focus.
After the Federal Reserve’s October meeting, short-term yields fell and long-term yields rose. BofA expects further US rate hikes and compares interest-rate opportunities in Europe, the UK and Canada.
Intermediate rates in developed markets have retreated from early-October highs, with growth concerns replacing some fears of rate hikes. JPMorgan believes valuations have become less cheap, favors German bonds over US Treasuries, and maintains its US yield curve steepening view.
Bond issuance by large technology companies remains concentrated in the investment-grade market, but a more regular issuance schedule could ease the pressure on the market to absorb it. Morgan Stanley also believes high interest rates are putting lower-quality borrowers to the test, while government bond yields are driven primarily by macroeconomic factors.
Bank of America’s quantitative indicators remain biased toward emerging-market currencies, but upward revisions to growth expectations have peaked and the dollar-weakness trade is fading. Interest-rate markets are diverging, while external debt positioning and valuations constrain the scope for a rebound.
Clients interviewed were generally bullish on US technology stocks and inclined to expect appreciation of the renminbi and Korean won. Nomura is more wary of the impact of a US equity pullback on USD/JPY and the won, and believes the renminbi could appreciate faster than implied by forward rates.
A decline in risk assets supported US Treasuries, but BofA still expects a Federal Reserve rate hike. French government bonds lack new buyers, while the ECB faces pressure to reassure markets. Australian and Japanese rates trades depend on how much tightening is already priced in.
Energy inflation continues to constrain central banks, but AI-related safe-haven demand is again supporting bond markets. Goldman Sachs favors the middle of the US curve, eurozone flattening and UK gilts relative to swaps, while raising its forecasts for French and Italian sovereign spreads.
Nomura has raised its conviction in a bullish offshore renminbi position, maintained its long Singapore dollar versus Indonesian rupiah and receive-fixed Hong Kong and Korean rates trades, and exited its position betting on higher Singapore rates. The central themes are slower inflows into US assets and safe-haven demand, but local policies and capital flows determine how much each market benefits.
