Was July the end of the beginning, or the beginning of the end of the current rate hiking cycle? Most G10 central bank rate paths are now priced at, or close to peak rates. The softening of July data in Europe and the US provoked a dovish hike of 25bps each. Other than jawboning from ECB president Lagarde and Fed Chairman Powell about data dependency on a meeting by meeting basis, there was little extra narrative to suggest further tightening. Data in the UK came in softer than expected, reversing some of the strength of the previous months, which pulled back pricing of further significant hikes from 150bps to about 90bps. This has resulted in a market split on pricing about an increase of 25 or 50bps at the August BoE meeting.
After a prolonged rate pause, the BoC followed up last month’s 25bps hike with another one in July. What might turn out to be a watershed event, and after months of speculation, the BoJ did a micro tweak of its YCC policy. This came not as expected by officially widening the +-50bp bands but instead allowing yields of the 10yr JGB to exceed the existing limit up to a hard cap of +-100bp on a “temporary” basis. This had an immediate steepening effect on sovereign curves globally. However, the BoJ intervened with unscheduled bond buying a few days later to keep everyone on their guard. This policy change makes JGBs more attractive to large domestic Japanese investors, at the expense of international sovereign bonds. This is a very powerful flow that may have extended repercussions on the perceived defensive nature of bonds.
The PAM G10 Macro Rates portfolio is positioned to benefit from steepening yield curves, a dynamic that tends to happen in the late part of the business cycle. The recent normalisation of G10 rates, on interpreted final phase of hikes, have benefited a number of mean reverting trades in our portfolio. The continued softening in data from the lagged impact of monetary tightening gives us confidence in the future opportunities for healthy returns.
The US 10y closed the month 12.0bps higher and 5s-30s swap was 13.2bps flatter.