Big week for data signals as traders primed to put cash to work

Published on 2 April 2024

Robert Daly, director of fixed income at Glenmede Investment Management

Robert Daly, director of fixed income at Glenmede Investment Management, discusses how it’s a big week for economic data signals as trading desks are eagerly waiting to put cash to work. Traders will be awaiting signs that could cue central banks to transition from a hiking to a cutting regime.

Daly also unpacks his predictions for cuts this year; how he expects liquidity across assets to play out in the second quarter and warns that traders should be wary of market concentration and risk compensation in riskier assets.

Additionally, the fixed income head looks at the record breaking quarter for bond issuance; how he imagines the supply versus demand dynamic to unfold over the next few months, and how concerned investors should be in the short and long term over growing government debt.

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North America: Weekly Review and Outlook on Markets

  • Equities volumes were down compared to the highs seen this year so far but bid-ask spreads remain favourable.
  • US IG volumes remain very elevated and saw one of the best weeks for bid-ask spreads this year.
  • Data: US ISM Services April 3; Canada and US’s job numbers on April 5
  • Primary Equities: 0 IPOs expected as of last Thursday’s reading (March 28)

Europe: Weekly Review and Outlook on Markets

  • Equities volumes dropped off from the huge highs of the first quarter and spreads widened marginally week on week.
  • Euro investment-grade volumes had one of the lowest weeks this year but had one of the best weeks for spreads.
  • Data: EU’s Inflation rate on April 2 and EU PPI numbers on April 4.
  • Primary equities: 0 IPOs expected as of last Thursday’s reading (March 28)

Trader TV Interview Transcript

Presenter, Jo Gallagher – Robert, we have lots to discuss. Set the scene for us. What will be the main market drivers for this week?

Robert Daly – Markets will continue to be looking at data and really how the data shapes the Federal Reserve’s reaction function. Meaning when will they cut rates? We have a lot of data on the calendar this week from ISM to non-farm payrolls. And then two weeks ago, the fed was moderately dovish, which put a tailwind in performance in the first quarter. And I think that that’s going to be how we navigate the market going forward, specifically around if the data is weaker, will the fed react sooner?

I think that’s what we’re watching for. I expect money, though, to continue to be put to work across asset classes, given valuations look fair and the market has ample cash to put to work. And why is this? Because all-in yields remain attractive specifically with elevated rates which tens (ten year) being at 4.25% supply has been robust and gobbled up by the market.

There’s durability of income for fixed income, and I think that’s going to continue given the borrowing costs have eased since the beginning of the fourth quarter of 2023. Companies want to come to market and buyers have been insatiable and their appetite flows should continue to be positive, given there is no sign that these buyers are going to be stepping away. And I do believe that there’s going to be more supply into April, I think rate cuts this year going to happen, but I’m in the camp that it’s 2 to 3, not higher than that, given the strength of the economy, right now.

I’m more targeting a June, possibly July for the first rate cut because the strength that we continue to see, the labor strength, and the stickiness of inflation, that gives the Fed room to be patient. So what’s going to create volatility on the go forward is data. I think liquidity is still ample. But it’s hard to buy bonds right now. And I think that’s going to continue because there’s so much cash out there to be put to work.

Speaker 1 What is your outlook for liquidity across assets and what are your expectations in terms of price activity going into Q2?

Robert Daly Fixed income has had a great quarter as has equities. There are no signs liquidity is drying up as deals have been brought to the market.

What is interesting is that active management right now is more important than I’ve seen in a while, and that’s going to be something going forward. Securities selection and asset allocation matters greatly. Rates are not at zero anymore. The up in quality allocation in portfolios is a lot of value given all in yields as well.

I think that there is a competition of capital because the safety valve in portfolios is real, and that’s going to be something that’s going forward to create a more broad-based framework for investing. The strong economy near historical types and spreads and steadily declining yields from the peak of last year has ushered in more supply in markets at large and specifically in junk and IG, which has increased liquidity in markets.

I don’t expect this to change anytime soon. I expect demand to continue humming. I also believe we’re headed for a soft landing. It certainly seems that way, barring mistakes from central banks. So this is all bullish for markets. And the regime is changing from hiking to cutting globally. So for us we’re strategic buyers of the market but we’re picking our spots.

I think treasuries have value, investment grade, mortgages, really the higher quality parts of the market. I do think yield is going to continue to be bought and maybe it’s more broad-based. But I think given the valuation framework and the amount of all-in yield that you got being up in quality specifically, given where valuations are, it’s a good spot to be.

There’s a lot of concentration risk in the market. I think some investors will get out of equities and move to fixed income because of where valuations are, and I think there are opportunities there. But I really do think picking your spots is the right place to be.

Yields warrant ownership of these higher-quality assets. But as you continue to go down the capital stack, risk compensation isn’t there and there is a little bit more hair on things as you see defaults start to pick up in some of the lower-quality parts of the capital structure.

Presenter, Jo Gallagher We’ve had a bumper quarter as well in terms of bond issuance, and we also hear about the growing concerns around global government debt. What would you be advising desks in terms of their short and long term strategies when it comes to the supply versus demand dynamic?

Robert Daly I would say right now I’m not worried about the amount of debt outstanding, but I do think it needs to be top of mind longer term. Corporates are in very good shape, and I think it’s specifically an issue on sovereign balance sheets.

Given the amount of cash in the system, buyers want to purchase that at good yields and have been coming to market. So here and now, not an issue. Over the quarter domestically, there was 529 billion of issuance and investment grade credit, which was the busiest quarter ever on record. This outpaced the Covid quarter of 2020, which was at 479 billion.

The reason why this is happening is borrowers are coming to market to strengthen balance sheets, given the perception of a looming correction or macro events that are out there and in high yield. For example, the first quarter was 85 billion of issuance, making it the busiest quarter since 2021, and was up 117% from this time last year.

The market looks past this. There’s a lot of issuance coming to market and it’s being bought hand over fist. Deals are oversubscribed, and they’re not thinking about the longer-term ramifications of where debt is problematic. And I don’t think it is on the corporate side. I think it’s much more of a sovereign issue, but not here and now.

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