Spotlight on Jackson Hole; opportunities in interest rate volatility and EU bonds

Published on 21 August 2023

Noah Wise, senior portfolio manager at Allspring Global Investments unpacks what trading desks and investors should take from this week’s US Fed meeting; how to capitalize on the recent interest rate volatility, and where his traders are finding hedging opportunities in European bonds.

North America

  • Us equities volumes are still low for the year but liquidity has improved week on week and is good for 2023.
  • US investment-grade debt volumes are just below average for the year but bid-ask spreads are tight for the 8-month rolling average.
  • Data: The main event will be Jackson Hole Aug 24 – 25. Q2 Earnings: Zoom, Nvidia, and Snowflake.
  • US axe data, which is within normal ranges, indicates a higher proportion of selling versus buying in credit.

Europe and the UK

  • Europe equities volumes are very low for year to date but liquidity is good for 2023 averages.
  • Euro investment-grade debt volumes are extremely low but bid-ask spreads are tight for the year.
  • Data: Eyes will also be on policymakers at Jackson Hole starting August 24 and earnings.
  • EU axe data, which is within normal ranges, suggests a higher proportion of EU dealer asks Vs bids in credit
  • GBP axe data, within normal ranges, suggests much higher net selling Vs buying of credit

Transcript of Interview:

Jo Gallagher: Welcome to Trader TV This Week in North America.

Last week’s volumes across assets remain low, but bid-ask spreads are tight for year to date levels. This week, the spotlight will be on the Jackson Hole symposium starting on August 24th.

In Europe and the UK volumes are also very low across equities and investment grade debt, but markets appear liquid. It’s a quiet week for market events, but traders in the region could be sensitive to any surprises including Q2 earnings.

Now, in more detail, in North America last weeks equities volumes were down week on week and remain low for year to date levels. Despite the low volumes, liquidity has substantially improved compared to the beginning of August, and bid-ask spreads are tight for 2023.

Volumes in US investment grade debt saw little difference week on week but are still just below average for the year. Liquidity appears good in IG and bid-ask spreads are very tight for the eighth month average.

This week the main event will be the Jackson Hole Symposium starting August 24th and trading desks will be listening out for any signals from US policy makers on how long we can expect interest rates to stay elevated. We’ll also see another wave of Q2 earnings reports this week. Among the large cap names, we can expect to hear from Zoom Communications, Nvidia and Snowflake.

US axe data, which is within historical ranges indicates dealers asks have increased by 3.2% over bids in the past week, suggesting an increase in net selling of credit going into the week ahead. In Europe and the UK, equities volumes are still very low for the year due to the holiday season and low participation in the market. Liquidity, however, remains good and spreads are relatively tight for 2023 averages. Last week’s euro investment grade debt volumes are down yet again, week on week, and are extremely low for the year’s eight month rolling average.

Liquidity seemingly remains good and bid ask spreads, while wider week on week, are still tighter than normal ranges for the year. This week will be quiet in terms of economic indicators or market moving events, but European traders will also be keeping an eye on Jackson Hole and be watchful of any major surprises in earnings.

EU axe data, which is within normal ranges, indicates the proportion of EU dealers asks versus bids has increased by 6.2%.

GBP dealer asks are up by 13.1% against bids over the past week, suggesting a very strong leaning towards selling versus buying of credit going into the week ahead.

I’m Jo Gallagher and I joining me to discuss week ahead we have Noah Wise of Allspring Global Investments.

Noah. Welcome to the show.

Noah Wise: Thanks for having me.

Jo Gallagher: We have the Jackson Hole Symposium this week. What are you hoping to learn from that and how does it fit into your wider economic predictions?

Noah Wise: I think you have to start with the title of the speech that Fed Chair Powell is going to be giving this week. It is called ‘Structural Shifts in the Global Economy.’ There are some big shifts going on right now, the biggest being the end of hyper globalization. And it has big implications for investing. The biggest, in our view, is that this longer term, disinflationary trend that we experienced for the last couple of decades is largely over. In the last couple of decades he did really well by putting on long term trades and holding those. Tech oriented stocks did incredibly well in the fixed income market. During this era you wanted to be long duration and long credit. Going forward you need to be more nimble and dynamic. Investing with these longer term, secular biases are not going to be as beneficial where growth is more volatile and inflation more two way than what we experienced in the last couple of decades.

Jo Gallagher: And how are your traders taking advantage of the interest rate volatility right now?

Noah Wise: Earlier this month, when the non-farm payroll number came out in the US, we saw interest rates spike coming into that number on relatively quiet news. The actual data that came through was pretty close to consensus. And despite that, rates ended up retracing that move higher.

As we come into Jackson Hole, I think folks are starting to worry about those same things that they were worried about a couple of weeks ago, trying to hedge their portfolios a little bit, concerned about interest rate moves or seeing yields move higher. And we think this could be another environment where expectations are a little bit too aggressive. We think there’s an opportunity, again, to be layering in some duration in the portfolio. Where to do that, we would argue the five year part of the curve. You’re getting enough duration that if rates do come down, you can get material capital appreciation. If you go too far out the curve, there is more downside risk out in, say, a 30 year. So we think the five year is really that sweet spot.

The second area that we think is really attractive and interesting is in agency mortgages that have embedded options for mortgage holders to prepay their mortgages in the United States. You know, investors need to be compensated for that risk. It just so happens that this is a time where investors are getting compensated at pretty close to a two decade high, in particular with a new issue, high coupon mortgages.

Jo Gallagher: Where are some of the overlooked opportunities when it comes to European and UK bonds?

Noah Wise: A lot of global investors have kind of fallen asleep on some of these non-US, developed market government sectors, and it’s easy to understand why, right? For most of the last decade, we were seeing 0% interest rates or even negative interest rates. In the last year and a half, not only have we seen European government bond yields move higher, move from negative yields into significantly positive nominal yields, but the hedging costs for European investors declined dramatically. And from a US-based investor perspective, the hedging benefits of hedging euro-denominated assets back into dollars is actually at some of the highest levels that we’ve seen in quite some time.

Jo Gallagher: Walk me through your trading strategy when it comes to European financials.

Noah Wise: Within Europe and in the US as well, the banking sector fundamentally is about as strong as it has been. You know, from a fixed income investors perspective, you want stability. And one thing that provides stability is really high levels of capital. And in capital ratios within the banks, within Europe, within the US are about as high as they’ve been in the last couple of decades. So you have a strong fundamental balance sheet picture.

On top of that, you have very attractive valuations. You can look at, you know, some of the national champions, you don’t need to get into the small regional cusp-types of names. You know, something like BNP Paribas we think is quite attractive. You can go lower in structure for the more aggressive investors and get even closer to higher, single digit types of yields. We think these are really attractive investments given the strong fundamentals.

Jo Gallagher: Thank you, Noah for your insights, and thank you for watching.

This has been Trader TV This Week.