Global debt flows: Steepening trend is tactical; expect a reversion

Seven things learnt from latest flows data

1)    The curve steepening theme of late is evident from flows, as there has been some clear underweights set in long end funds. This has been especially of note in government funds, but has also been a feature in corporate funds in the past week.

2)    That said, there is also evidence of outflows from money market funds alongside inflows to corporates generally including high yield. Hence there remains firm evidence of players looking to get long spread where possible.

3)    It would not surprise us to see another week of long end outflows, but we doubt it becomes a precipitous move. The fact remains that average inflation targeting cannot guarantee inflation in the first place.

4)    Large output gaps should see a bid return to long duration plays on any material cheapening up of long end rates. The flows into US inflation funds have acted to drive down real rates – not the best way to achieve higher inflation expectations.

5)    The inflow process to emerging markets remains reasonably solid. Relative stability in core rates is helping, and heightened volatility surrounding Powell’s ambition to target average inflation ahead has not had a material effect on EM.

6)    Hard currency continues to outperform, as some higher beta local currency markets have struggled. More recent data point to an improved appetite for local currency, helped in no small way by a weaker USD tendency.

7)    Total returns are still running in the red year-to-date for EUR high yield. But, overall global high yield inflows have more than matched prior outflows. With the USD 5yr CDS index now below 400bp there is quite a benign default risk in the price.