RBC BlueBay: Most investors we meet positioned long in US duration

RBC BlueBay: Most investors we meet positioned long in US duration

8 september 2023

Monetair beleid
Outlook vooruitzichten (08) weg storm crisis

It seems like the consensus is now long of credit, with bears having capitulated over the summer.

‘Building evidence of sticky inflation could make the case for further monetary tightening yet to come,’ said Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management today. ‘At the same time, it strikes us that most investors we meet are already positioned long in US duration. This means that yields are vulnerable to another leg higher, should data disappoint, leading to a capitulation with respect to these positions. Although we can now see some value in 5-year, 5-year forward rates at 4.15%, we therefore continue to think that it is wise to wait until after next week’s CPI data is released before considering whether a tactical long trade in duration may look appealing.’

‘At next week’s ECB meeting, we think that Lagarde will lower growth projections, acknowledging that the downside risk scenario described at the June meeting has played out over the past couple of months’, Dowding said. ‘The September ECB rate decision is a close call. However, what remains clearer is that it will be difficult to see rates cut next year with inflation likely stuck above the ECB target for a protracted period. In this sense, there is some discussion of stagflation risks amongst policymakers.’

Consensus long of credit

‘It strikes us that some of the optimism we detected earlier this year, after the Continent had avoided a nasty recession last winter on energy supply disruption, has now been replaced by a sense of concern that the Continent may be facing a couple of years of economic stagnation.’

‘We expect growth to moderate and interest rates to peak, but with curves inverted and positioning already long, it seems risky to become bullish prematurely at the wrong level. Meanwhile, it seems like the consensus is now long of credit, with bears having capitulated over the summer. This could also make markets vulnerable to a re-pricing, were we to see a return of volatility.’

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