Bond markets will be closely watching employment data this week says James Athey, senior fixed income portfolio manager, at Malborough, for any signs of labour weakness, which could push the Federal Reserve towards earlier rate cuts.
The PM shares his views on the lead drivers moving markets; the impact of headline volatility on directional flow, and the looming questions over tariff risks.
In this episode, Athey also unpacks where he sees growing investor complacency; the importance of prioritising liquidity in the current trading environment, and where he sees concerns rising over shifts in private markets.
Transcript
Dan Barnes Which signals and information are you going to be using to navigate the bond markets this week?
James Athey Obviously the big data points for the Federal Reserve are inflation and employment because that tallies with their mandate and given that it’s the first week of the month we have some of the big ones. We’ve got ADP, a report on employment, we have the ISM surveys and then that all culminates on Friday with non-farm payrolls. Given there’s been such a large focus on inflation particularly because tariffs are expected to raise prices, of course that’s going to be hugely significant. But I don’t think over the next week or even over the next month, we’re going to get sufficiently certain information about that for the Fed to make a really strong call. So for me, the focus is going to be on employment, because if we were to see a meaningful deterioration in that data, I do think that could encourage additional members of the Federal Reserve Committee to begin thinking about earlier rate cuts. And of course, for bond investors, that would be hugely important.
Dan Barnes We’ve seen a very volatile news cycle recently, but has that translated into market volatility?
James Athey A couple of years ago, I coined the term narrative table tennis to describe this back-and-forth that financial markets were stuck in as various competing stories, competing data points, and really competing drivers fought one another, pushing yields higher and lower in a seemingly endless back-and-forth on a day-to-day basis. And we seem to be getting ourselves back into a similar dynamic. If you look at the daily candles for the treasury market, for example, you see that we’ve had this consistent run of very large intraday moves. But the interesting thing is that has continually been resolved with lower yields. We’ve seen a decent trend lower in treasury yields. I think as investors have just become a bit more aware of the softening of the economy and the fact that really as yet we haven’t seen any significant inflation impact from tariffs that were implemented in April.
Dan Barnes Do you think there’s a risk of investor complacency through desensitization to all of this noise?
James Athey I think that’s always a risk. I smile somewhat wryly because as a bond investor. I’m always sort of looking to the negative spin. And when you observe equity markets, they tend to take the opposite interpretation. But I do think that really has got considerably worse recently. Markets have sought to find the good news in every piece of news. And I think unfortunately that’s led to them taking a rather binary view of certain outcomes. I think the example of tariffs is a good one. We have seen better news, certainly with respect to tariffs, as the president has really walked back from the cliff edge, just in terms of the magnitude of the tariffs that he’s seeking to implement. But the reality is the pause that was announced for 90 days does come to an end soon. There’s no guarantee. That tariffs won’t be implemented again in larger size because there really has been a failure to sign significant trade deals, and yet the market finds itself back at the all-time highs in terms of equities and in fact is trading now at 24 times earnings at a time where actually earnings growth has slowed considerably. So I do think there already is significant complacency within markets.
Dan Barnes So how can traders best manage risk in this environment?
James Athey Ultimately, volatility and liquidity are two sides of the same coin. So when the market is more volatile, particularly in bond markets, which are traded off exchange and therefore intermediated by banks, brokers and counterparties. When a trader takes down some risk from the buy side, they have to consider how easily they’re going to be able to get out of that risk without the price moving significantly against them in the meantime. And of course, if prices are more volatile on a daily basis, a trader is likely to charge us more for executing trades. So that’s going to mean effectively lower liquidity. So the best thing really for buy-side portfolio managers and traders to do is to just seek out those most liquid points. If I’m trading treasuries today during these somewhat more volatile conditions, I will always try to use on the run issues where liquidity is significantly better than these older off-the-run treasury issues.
Dan Barnes What do you think we can tell about issuer and investor sentiment at the moment, based upon the level of issuance we’re seeing in public markets, but also that migration into private markets?
James Athey Private markets and investing into private markets has obviously become a really significant discussion and debate and indeed trend in recent years but really particularly in recent months and it’s gone so far that we’re actually seeing the Chancellor of the Exchequer here in the UK actually considering either encouraging or even mandating large institutional investors in the UK to invest more significantly into private markets. I have to say this does concern me slightly, you know, it’s akin to when a news item is on the front page of the Financial Times, the chances are that’s already in the price and you should think about going in the other direction. You know, growth of private assets has been ongoing for many, many years now. I do think maybe the pendulum has swung too far. Some of the benefits of private investing relative to investing in public markets have probably been overstated. And we are starting to see some concerns seeping in, and we are starting to see investors really trying and sometimes struggling to exit the asset class. What does that say about sentiment in terms of public market and issuers and issuance? I don’t think a great deal. We still see significant demand for new issues in public markets. I think largely investors still believe that default risk is low because recession risks are low. We ourselves are more concerned, I think, we see spreads as being too tight relative to this stage of the economic cycle. And we think in a lot of cases, you are not being compensated as an investor through the spread for the risks that you’re taking in those corporate securities. But for now, it seems clear that the market doesn’t yet agree.
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