US Treasuries Surge while Fears Amid Financials, Chemicals Sector, and UK Gilts

Published on 10 July 2023

Peter Baden, chief investment officer at Genoa Asset Management, discusses the buy side’s house view on trading fixed income following the weakening US labour market; the potential return of banking turmoil; and the risks to look out for in the chemicals sector and UK Gilts.

North America

  • Volumes across assets were low year to date. Liquidity in equities worsened but spreads in US Investment grade were still tight for 2023. 
  • In primary equities: There are several IPOs in Industrials on Nasdaq and NYSE on July 13.
  • Data: US Inflation rate, CPI, Fed’s Beige Book, Core PPI, Initial Jobless Claims, and bank earnings. 
  • US axe data, which is within normal ranges, indicates a higher proportion of asks versus bids in credit.

Europe and the UK

  • Volumes were still low across assets. Liquidity in equities is moderate but in Euro investment grade  is relatively good for year to date. 
  • In primary equities: There are several IPOs in Consumer Discretionary on July 10 and Industrials July 11  on Euronext.
  • Data: UK unemployment rate and Payrolls on July 11. GDP and manufacturing on July 13.
  • EU axe data, which is within normal ranges, suggests a slightly higher proportion of EU dealer bids Vs asks in credit
  • GBP axe data, within normal ranges, suggests a much higher net buying Vs selling of credit

Transcript of interview:

Jo Gallagher: Welcome to Trader TV This Week.

In North America last week’s volumes across assets were low as markets were out for the 4th of July break, but this week could see activity pick up as we await the latest reading on US inflation and the first wave of Tier one bank earnings. In Europe and the UK, the summer lull continued into last week, but this week could see more volatility in UK gilts and markets could react to numbers out on the UK unemployment rate.

Now in more detail.

In North America, the 4th of July break saw volumes continue to trend low in US equities last week, where levels were well below the six month rolling average. Bid ask spreads however saw a marginal difference week on week, but are still wide for year to date ranges. US investment grade volumes also dropped off substantially last week due to the national holiday and were low for 2023. Despite the low volumes, liquidity saw little difference in US IG week on week with spreads are still tighter than the year to date averages.

In primary equities, we can expect IPOs and industrials on NASDAQ and New York Stock Exchange this week. It’s a big week in terms of data, and markets will be reacting to the US inflation rate and the Consumer Price Index on July 12th. We’ll also have US’s core PPI on initial jobless claims on July 13. Several large cap names will also kick off their Q2 earnings at the tail end of this week, including JP Morgan, BlackRock and UnitedHealth Group.

US axe data, which is within historical ranges, indicates Dealers’ asks have increased by 1.4% over bids in the past week, suggesting a slight increase in net selling of credit going into the week ahead.

in Europe and the UK, last weeks equities volumes dropped off similar to the US and were generally low for 2023. Liquidity appeared to see a slight improvement week on week, but bid ask spreads are ranging near to average for the year.

Euro investment grade volumes saw little difference week on week, but volumes are low for the six month average. Bid ask spreads widened compared to the week prior, but are relatively tight for the year.

In primary equities, we can expect IPOs in consumer discretionary and industrials on EuroNext. This week we can expect UK unemployment rate on payrolls on July 11th and the UK’s GDP and manufacturing numbers on July 13th. EU axe data, which is within normal ranges, indicates the proportion of EU dealers bids vs asks has increased slightly by 1.2%. GBP dealer bids are up by 12.6% against asks over the past week, suggesting a strong leaning towards buying or selling of credit going into the week ahead.

I’m Jo Gallagher and now joining me to discuss the week ahead, we have Peter Baden of Genoa Asset Management.

Peter, welcome to the show.

Peter Baden: Thanks, Jo. Thanks for having me.

Jo Gallagher: Starting with North America set the scene for me there. How should traders be approaching this week?

Peter Baden: So we’re coming off of a good week last week where the employment number was weaker than people expected, and that gave a really nice boost to the bond market. As we get into the CPI and PPI numbers, we think that that’s also going to follow through with some decent numbers that can be strong for showing the disinflation in the market. We’re getting long into a lot of the different tenors in the US. Specifically, we love the two year. I mean, when it hit 5%, we were buying big time and we’re also out buying the three, the five and even the ten year. We think all of those have some really attractive risk reward dynamics. With the yields that we have right now. It really buffers that downside. So you can get into a trade, make the trade, hold it for a couple of days, get that nice income off of it, get out of it. And we think the strong employment number, but also the CPI number, we think that’s going to bring great liquidity in the market. The first six months of the year, you saw great runs and credit, you saw great runs and taxable munis and other instruments. This is a good time to take some of those gains off the table, reposition it maybe back into some of the areas like Treasuries and things like that, and really get some of that back in the position. Going to be good bids all the way across the board.

Jo Gallagher: Markets are expecting a rate hike in July and potentially another one by the end of the year. Are you concerned about any banking turmoil reemerging?

Peter Baden: Absolutely. I think that that’s something we have to keep a close eye on. Banking’s got some balance sheet issues. Certainly everybody passed the Fed’s test, but that doesn’t necessarily mean they’re out of the problem zone. So I think you’ve got to look at commercial real estate, interest rate, impact on their balance sheet. When the banking crisis happened, rates went down significantly. That really helped their balance sheets. Rates have now come back up. How is that affecting them?

I’m still very wary of banks, but that’s also an opportunity where you can try to pick up the really good banks that are just traded off because the really bad banks are not doing a good job. We made so many great trades back in the mini banking crisis, as I like to call it, and really set up some portfolios for some nice returns this year.

Jo Gallagher: Brilliant. And we look across to Europe now. Why should traders be keeping an eye on chemicals and base materials?

Peter Baden: On the 20th, the Lancers chairman came out and called this the Lehman 2 Moment in chemicals. That’s a pretty significant statement. They’re seeing demand come down in Europe, no creation of demand that they thought would come forth in China. And if you don’t see any demand for chemicals, then that means the base economy is really not taking off. If everybody’s sitting on a bunch of inventory, that could be good for inflation. If they have to cut prices or they’ve got to figure out a way to get it out of there without cutting prices, and that just doesn’t sound like it’s going to happen. So we think it’s going to be good for inflation. It’s not going to be great for earnings and it’s not going to be great for credit. But we could see some downgrades and, you know, some tight spots for them going forward and it might go into some of the other basic industries, but definitely in chemicals right now.

Jo Gallagher: What’s your view on the UK gilt market? What are the opportunities and risks there?

Peter Baden: We have to look at the inflation that’s going on in the UK. They’re a little bit behind the US on the inflation front. They were not as aggressive as the Fed. And now it seems like they’re going to have to catch up to it. So we’re not very excited about gilts in this market. If you want to get in and hold it for a while, it’s got some great opportunities and some great yields in there. But we expect more weakness in that market, especially in the next couple of weeks and maybe even the next month, that if you want to trade it, your bids are going to be tough. You’re liquidity is not going to be great. So getting in a great place that you feel like you’re happy with it. And then if you can get out and take your profit, so much the better. Otherwise, I think you’re going to see some relief here sometime in the next couple of months as the Bank of England tries to solve the problem.

Jo Gallagher: Brilliant. Thank you, Peter, for your insight and thank you for watching

This has been Trader TV This Week.