This week, we have seen US Treasury bond yields rise again to break through the psychological barrier of 3% (+23bps to 3.16%) in the case of 10-year Treasuries. Meanwhile, the short end of the curve has seen even larger increases: 5-year UST +31bps, 2-year UST +38bps, reflecting fears of higher interest rates due to inflationary surprises. Even so, we have seen a week of tighter relative spreads in the region as a whole, where we have seen that credit spreads have done their job in alleviating these base increases.

May's inflation data, which was higher than expected for the US economy (1% vs. 0.7% expected), does not help to keep the bond market calm, given that this would mean that we need a more proactive Fed in its plan to raise rates, which would change the structure of short-term and long-term interest rates, due to fears of more aggressive quantitative tightening . For now, the market expects the Fed to raise rates by 50bps at its June, July, and September meetings over the next three months. Larger increases than these would have a negative impact on corporate bond prices, as the instrument's coupons would have to be discounted at a higher rate.

Despite this negative movement for the asset class's returns, this week saw a revival in the primary issuance market with protein sector giant JBS (BBB-/Baa3/BBB-) issuing debt in USD in three modalities: 5, 10, and 30 years. Combined demand for these securities was over 5bn, placing 500mm at 5y with a spread of 225bps, 1.25bn at 10y with a spread of 287.5bps, and 750mm at a pricing of 337.5. In our view, these were fairly reasonable valuations given the issuer's existing curve, with room for capital gains by participating in the issue.  

All in all, nervousness will continue to be present in the coming days, during which bonds will have to reprice this aggressive rise in base interest rates, making the light at the end of the tunnel still far from even being visible.

 Adolf Erpel

Money Table Team