Global debt flows: Buying of duration mutes steepening theme

In contrast they have been sellers of corporates and high yield, while steady inflows to emerging markets continue.

Six things learnt from latest flows data

·      The US Treasury market continues to trade with a nod towards a reflation bias, despite the angst and gloom that is keeping Bund yields deep in negative territory. Flows against that backdrop have in fact been into government bonds. Had there been outflows, the rise in US Treasury yields could have been more severe.

·      As it is, the long duration inflows process is muting the extent of directional US curve steepening. At the same time there has been a clear tint of risk-off in the bond flows, as net liquidations have been a feature of the past week or so in the investment grade and high yield corporate space.

·      Emerging markets has been a steady beneficiary of inflows in recent months, and that process has continued right up to the latest week. While there has been some clear underperformances (eg, Turkey), there has been no contagion tail associated with Covid.

·      Rather, the focus has more been on the immediate hit to developed market economies and finances. The higher beta emerging markets have looked less battered against a wider backdrop that is chock full of angst.

·      Most of the flows have been into hard currency, but local currency has been a steadier recipient of late, and in fact has outperformed hard currency in total returns for October.

·      In corporate high yield, the issue is that the implied default risk backed out from where the market trades is quite benign relative to previous recessions. Hence the outflows and re-widening.