John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 29 December 2017 at 8:00 GMT

Four things to know about 2017: Bonds

Your Next Trade
  • The flat US yield curve scares some people. It shouldn't.
  • QE and the dovish ECB makes EUR-denominated issues expensive
  • The US and Fed policy will be the big focus next year

What were the year's key fixed income events? Photo: Shutterstock What was the biggest event of 2017?

Althea Spinozzi: In fixed income, the biggest event of 2017 has been the flattening of the US yield curve. Many people believe that this may signal an imminent recession. However, with the passage into law of President Trump's tax bill and synchronised growth worldwide, which supports a US expansion, I believe that 2018 would be a bit premature for another economic downturn. Bond investors can take advantage of a flat yield curve by staying in the short part of the curve.

TF: What was the year’s most overvalued asset? 

AS: EUR paper. I am referring to both high yield and investment grade bonds denominated in EUR. Spreads are at historical lows in the euro area due to a dovish European Central Bank and, of course, quantitative easing.

TF: What was the year’s most undervalued asset?

AS: This is quite a tough one. It's hard to say as everything is quite expensive in the fixed income market at the moment.

TF: What’s the next major thing on the calendar?

AS: I believe that next year the market will be focusing on the US and on Federal Reserve policies. If the Fed does hike rates (as expected), this may lead to higher yields worldwide. It is important to note that emerging markets may not respond well to this. EM and frontier markets have been issuing large volumes of bonds in the last few years and if the US dollar continues to be strong next year, we may see a spike in volatility in this space.

recession  Abandoned houses in Detroit. Some are scared of the flat yield curve but it's too early to call another recession. 
Pic: Shutterstock

— Edited by Clare MacCarthy

Althea Spinozzi is a sales trader at Saxo Bank.


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