The Looming Handoff for Global Fixed Income - CIBC Capital Markets ...
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CIBC Capital Markets and Macro Strategy invite you to our
Monthly Markets Call on:
The Looming Handoff for
Global Fixed Income
Transitioning from H1’18 to H2’18 will be challenging
Monday, July 16, 2018
10:30am EST / 3:30pm BST London, UK
Guest Speaker
Ian Pollick
Head of North American Rates Strategy
Moderator
Joan Pinto
Cross-Asset, Macro Strategy
MP3 recording available at: Participant dial-in numbers: +1 416 641-104 / 1 800 952-5114 (Canada / US)
https://www.cibcmacro. Click link for list of International dial-in numbers
com/Media.aspx Participant pass code: 3336407#
Instant replay dial-in numbers: +1 905 694-9451 / 1 800-408-3053
Click link for list of International dial-in numbers for Instant Replay
Participant pass code: 1061593#
The Looming Handoff for Global
Fixed Income
Ian Pollick July 2018
Head, North American Rates Strategy
CONFIDENTIAL
Interest Rates & FX Outlook 1
Higher Interest Rates Ahead – Four Reasons Why 2 1. Central Banks are normalizing monetary policy 2. Quantitative Easing is turning into Quantitative Tightening 3. Shifting composition of nominal yields 4. Funding costs are reorienting global flow-of-funds
Higher Policy Rates
June 2018
CONFIDENTIALReal policy rates remain negative but, less so than in 4
2017
0
-0.5
-1
United States (Fed funds
less headline CPI)
-1.5
Canada (BoC o/n less
headline CPI)
-2
Jan 17 Jun 18
Source: Bloomberg, CIBC Capital MarketsWhen taking QE into account, the FOMC has tightened a 5
lot more than broadly understood
5 Fed Funds Target Rate (%)
4 Wu-XIA Shadow Federal Funds Rate (%)
3 If we include the impact of QE, the FOMC
has raised rates almost 500bps!
2
1
0
-1
-2
-3
-4
01/08 02/10 03/12 04/14 05/16 06/18
Source: Haver Analytics, CIBC Capital MarketsA BoC hike in 2018 is not the same as a BoC hike in 2008 6 Source: CIBC Economics
Still some distance to go to reach terminal rates 7
3.3 CanadaMarket Implied Terminal Rate (%)
United States Market Implied Terminal Rate (%)
3.1
2.9
2.7
2.75%
2.5
2.3
2.1
1.9 2.0%
1.7
1.5
01/18 02/18 03/18 04/18 05/18 06/18
Source: Bloomberg, CIBC Capital MarketsTerminal policy rate expectations and long-term yields 8
70 bps
Market-Implied Terminal
58.08
60 Policy Rate YTD chg (bps)
47.67
50
10yr yield YTD chg (bps)
40
30
20
10 5.7
0
-10 -2.56
United States Canada
Source: Haver Analytics, Bloomberg, CIBC Capital MarketsQuantitative Tightening
June 2018
CONFIDENTIALDeclining balance sheets leading to declining liquidity 10
35%
Global Liquidity Proxy* Y/Y %
30%
25%
20%
15%
10%
5%
0%
-5%
03/06 03/08 03/10 03/12 03/14 03/16 03/18
*Sum of ECB, Fed and BoJ balance sheets and Global FX Reserves
Source: Bloomberg, CIBC Capital MarketsPublic to private handoff seen as a big catalyst for 11
higher term premiums
25 Trn
Change in Stock of Advanced Economy Sov Debt, by region & investor type
G4 - official
20 US - private
UK - private
15 Japan - private
Private Investors
Euro area - private
10
5
0
Based on IMF staff forecasts
-5
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: IMF, CIBC Capital MarketsSnapshot of North American Term Premia 12
0
US 10yr Term Premium (%)
-0.1
Canada 10yr Term Premium (%)
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7
-0.8
01/18 02/18 03/18 04/18 05/18 06/18
Source: Bank of Canada, Haver Analytics, CIBC Capital MarketsChanging nominal bond
compositions
January 2018
CONFIDENTIALReflation is driving cross asset return but, breakevens 14
have yet to meaningfully move in 2018
10 Global Macro Proxy (PC1)
8 Policy Normalization Proxy (PC2)
6 Reflation Proxy (PC3)
4
2
0
-2
-4
-6
*rolling factor loadings*
-8
-10
06/16 10/16 02/17 06/17 10/17 02/18 06/18
Source: Bloomberg, CIBC Capital MarketsReal yields look high in the U.S. , low in Canada – 15
breakeven inflation levels are the offset
Breakevens as % of YTD nominal sell-off
Real yields as % of YTD 10yr nominal sell-off
200%
150%
100%
50%
0%
-50%
-100%
-150%
United States Canada
Source: Bloomberg, CIBC Capital MarketsFunding costs & flow of funds
June 2018
CONFIDENTIALThe pick-up in select North American bonds is smaller 17
due to higher cross-currency hedging costs
3 % Select hedging costs into JPY (%)
2.5
2.5
2
1.3 1.4
1.5
1
0.5
0
5yr ONT hedging 5yr Canada 10yr UST hedging
costs (JPY) hedging costs costs (JPY)
(JPY)
Source: Bloomberg, CIBC Capital MarketsYield curve implications
June 2018
CONFIDENTIALForward curve relationships look odd 19
150
2000-to-date
130
GoC 5s10s curve (constant
110
90
maturity, bps)
70
50
30
10
-10
1y fwd 2006
-30 2000
0 2 4 6
GoC 5yrs (constant maturity, %)
Source: Bloomberg, CIBC Capital MarketsLess slack equates to a flatter curve 20
GoC 2s10s curve (lhs, bps)
300 0
BOS some + significant difficulty meeting
250 demand (rhs, inverted) 10
20
200
30
150
40
100
50
50 60
0 70
03/00 09/04 03/09 09/13 03/18
Source: Bloomberg, CIBC Capital MarketsQuantitative Tightening to change yield curve behavior 21
• When policy rates were at effective lower bound and, QE was in
full swing, yield curve behavior changed
• Yield curves were only able to: i) bear-steepen, or; ii) bull-flatten
• Higher policy rates and less QE allow yield curves to: i) bull-
steepen, and; ii) bear-flatten
• Why is this important? Be careful the curve exposure you ‘think’
you have (i.e. is it really a bullish or bearish expression)Slave to the traffic lights
June 2018
CONFIDENTIALNatural Speed Limit – Three reasons for a slow sell-off 23
1. Terminal rates, while still some distance from current
administered rates, are lower than in prior cycles
2. Eventually, investors will need to monetize QE
3. Regulatory change and pension fund de-riskingNeutral rates are seen lower today than in prior years 24
US estimated r*
4 Canada estimated r*
3.5 Euro Area estimated r*
3 UK estimated r*
2.5
2
1.5
1
0.5
0
-0.5
-1
01/00 07/03 01/07 07/10 01/14 07/17
Source: FRBSF Holston, Laubach, Williams estimatesQE still needs to be monetized 25
4700 FOMC Balance Sheet (lhs, USD$bn)
2675
4200 SPX (rhs, level)
3700 2175
3200 1675
2700
1175
2200
1700 675
01/07 01/09 01/11 01/13 01/15
Source: Bloomberg, CIBC Capital MarketsLate cycle de-risking to be amplified by prior asset 26
allocation trends caused by QE
14 USD$trn Sovereign
US & EUR LIFECO Bond Allocation %'s
100% 12 Securitized/collateralized
80% NR/Loans 10 Quasi and foreign government
Not IG 8 Corporate
60% BBB
6 Global stock of high quality
AAA/AA/A fixed income (Q417, BBB or
40% 4 higher)
2
20%
0
0% –1–0 0–1 1–2 2–3 3–4 4–5 5–6 6–7 7–8 >8
US 2008 US 2016 EUR 2008 EUR2016 Annual Return Profile (%)
Source: Bloomberg, CIBC Capital MarketsCIBC Capital Markets
Comprehensive Economic and Cross-Asset Strategic Coverage
Macro Strategy Economics Desk Strategists
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Canadian Government Credit Foreign Exchange Economics Team Rates
Maria Berlettano, CFA Patrick Bennett Avery Shenfeld Ian Pollick
+1 416 594-8041 +852 3907-6351 +1 416 594-7356 +1 416 594-7057
maria.berlettano@cibc.com patrick.bennett@cibc.com avery.shenfeld@cibc.com ian.pollick@cibc.com
Tom Bognar, CFA Jeremy Stretch Benjamin Tal Foreign Exchange
+1 416 956-6032 +44 0 207 234-7232 +1 416 956-3698
tom.bognar@cibc.com jeremy.stretch@cibc.com benjamin.tal@cibc.com Bipan Rai
+1 416 594-7925
Growth Markets Energy Commodities Andrew Grantham bipan.rai@cibc.com
(LATAM & Caribbean) & Foreign Exchange +1 416 956-3219
andrew.grantham@cibc.com Foreign Exchange & Rates
Mario Robles Joan Pinto
Royce Mendes Sarah Ying
+1 212 885-4475 +1 416 594-7268
+1 416 594-7354 +1 416 594-8302
mario.robles@cibc.com joan.pinto@cibc.com
royce.mendes@cibc.com sarah.ying@cibc.com
Luis Hurtado
+1 416 594-8284 Katherine Judge Canadian Corporate IG Credit
luis.hurtado@cibc.com + 416 956-6527
Adam Bulley
katherine.judge@cibc.com
+1 416 594-8510
adam.bulley@cibc.com
Institutional Equity Research Contributors
Equity Portfolio Strategy Energy Sector
Ian de Verteuil Shaz Merwat Jon Morrison
+1 416 594-7462 +1 416 956-6428 +1 403 216-3400
ian.deverteuil@cibc.com shaz.merwat@cibc.com jon.morrison@cibc.com
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