Hello and welcome. Thanks for joining the latest monthly investment podcast that we're doing. My name's Mark Dowding, and I'm Chief Investment Officer on the BlueBay fixed income platform and I plan to share for about the next 20, 25 minutes on some of our views and thoughts around fixed income markets globally and then allow a few minutes at the end for questions that anyone might want to sort of join in and come in with.

Anyway, it's been another interesting sort of month in financial markets, I guess. Starting in the US, we did last week see a somewhat better inflation print. We'd had a run of 3 inflation prints in the first quarter this year, with monthly gains of 0 point 4 on inflation that had really sort of come as a cause for consternation amongst the policy community. The down trend in inflation looked like it had been abated, and there was some sort of risk that actually, we could be seeing a renewed push up in inflation. So markets went into the CPI print last week, I guess, feeling a little bit nervous. But in the event, we saw a 0 point 3 number, which of course, is only marginally better than what we saw before, but I think, has helped to further allay any risk that markets worrying about the need for further rate hikes. We think the bar to a rate hike is really quite high, particularly ahead of the election. And so, if anything, if there is a need for sort of more policy restraint, I think it's more about keeping rates higher for longer rather than going down the path of actually delivering further interest rate increases.

Of course, on the other side of this there's plenty of debate as to when interest rates might start coming down. And I think here, what we've really come to understand is we're going to need to see several data prints that really confirm that inflation is on a renewed downtrend coming back towards the Fed's 2% target before the FOMC is going to be comfortable to do that. Though, of course we're having just had a print for April. If we see another couple of more benign prints over the course of the next couple of months. It's still, of course, possible that we see a rate cut or two in the second half of the year. And obviously we'll be sort of waiting for sort of data in that regard. I would voice the thought that I think the inflation data remains more important to the Fed than economic activity data at the minute.

In terms of looking at some of the activity data, there has been some anecdotal noise around, a bit of weakness coming out of the consumer sector. The latest retail sales print was also somewhat soft. But then, if you look at the labour market data, or certainly the last week's weekly claims. I don't think there's too much to get worried about just for the time being when it comes to the US Economy and economic momentum. Indeed, looking at the Atlanta Feds now cost count now cost model for GDP. That's running up around 3 and a half. So I think, although it makes sense to be attentive to try and understand whether there are any sort of new trends developing, particularly if that sort of speaks to more of a widespread economic slowdown. Certainly for the time being, that's not something that we're really seeing just for now.

So I think we're in a wait and see mode in terms of data. We think the front end of the US curve is quite close to fair value, albeit we are inclined to continue to look for yield curve deepening in our eyes. The yield curve is too flat, and we should end up seeing more term premium over time, particularly because the fiscal backdrop continues to deteriorate everything we continue to hear. Certainly, from our perspective, continues to point in the direction of tax cuts or more spending initiatives. And frankly, when we speak with policy makers in Washington DC one of the things that we're struck by is the bond market is the boy that's cried wolf a bit too often and in talking about the worries that we might have around elevated debt levels. And bluntly, if governments can, they borrow money on a 30 year basis for less than the prevailing cash rate, that inverted yield curve is almost sending like a sublime signal to policy makers that there's nothing to worry about in terms of debt levels for the time being, so they can keep on going down the current fiscal path that they're currently on. I do think that that though over time is going to pressure the curve to get move steeper, and so curve steepening trades. Really, the main view that we're running in terms of us fixed income right now in terms of wanting to be, relatively speaking, long of the 2 year part of the curve with an underweight in the 30 year sector.

Otherwise moving away from the US and towards Europe, nothing too much interesting to say, just for the time being, in the context of the eurozone. It feels like the ECB meeting in June is a done deal. We are expecting to see 25 basis points off rates then, and I think the baseline has been to look for another 25 basis points to follow a quarter later in September. That said, beyond that, I think that any further monetary accommodation in the eurozone is going to be contingent either on inflation behaving a lot better, or indeed on us rates moving lower at that time. But I would highlight for the time being, if anything, European economic activity has been looking a little bit better than it was this time last year. And also on the inflation front, although we've seen European inflation be a lot better behaved than US inflation has been over the course of the recent months. I would highlight that when you look at sort of economies like Spain, it does look like inflation in the in some parts of the U.S.A. may have bottomed and may actually be trending a little bit higher again, and I think this is something that the ECB board will also be attentive to, particularly at a time when labour markets continue to be really quite tight in the region.

And so from that perspective, we continue to think that bonds are, broadly speaking, around fair value. I don't think there's a particular trade to be had just in the here and now in terms of European sort of spreads or absolute rate levels. I think in Europe, the market that's looking potentially a bit more interesting is the UK. Here in the UK we get inflation data later this week and it's widely expected that we're going to see a big drop in the year over year inflation print, that's largely on base effects with utility prices which get set in April adjusting much lower this year than they were a year ago. when we're still dealing with the fallout or the worst of the fallout with the war in Ukraine, and that impact on energy prices. So we, we should see a benign number. But I think that there's lots of evidence that away from that one offer impact inflation in the UK continues to run at a level that's higher than the Bank of England's 2% target. We're likely to see service inflation remain well above 5%. We saw wage data suggesting that UK wages are growing at 6% last week with the national living wage having just increased. And all of this I don't really see that compatible with a 2% inflation target and with this being the case, I think it's going to be more difficult than some may currently appreciate for the Bank of England to cut rates very much this year. I know that they're going to be under political pressure and a rate cut. Possibly even 2 could be delivered. But thereafter, I think, if anything that there'll be more of a case that UK rates could actually move higher rather than lower beyond that particular point as inflation moves back up. And also with us concerned around sort of ongoing political and fiscal risks in the UK.

So happy to stay on the short side in terms of UK guilts, as we also are positioned in Japan. We saw last week the BOJ maybe reluctantly sort of announced that they were starting to reduce some of its bond purchases. And that's actually seeing yields move a little bit higher, even as yields have moved lower in other markets. That's certainly interesting to note. But one of the things that we've really thought we should see is that the BOJ needs to draw a line under quantitative easing. We don't think they're necessarily going to move straight away to start moving towards policies of QT and shrinking their balance sheet, but certainly the idea that Japan is continuing to grow its balance sheet, I think, is something that kind of needs to be revisited at a time where that continues to put pressure on the value of the Japanese yen, which has obviously reached a point where it's having sort of detrimental impacts on Japanese society and policy makers are wanting to push back on this. Ultimately, I think, after we do see an end of balance, sheet expansion in Japan, we are expecting further interest rate hikes to follow. And we've been targeting rates to rise to 50 basis points during the course of this calendar year. With that being the case. I think that it's really very unlikely that JGB yields will be moving higher. Sorry lower, I should say, whereas a move up in Japanese yields is much more likely that return. Asymmetry, I think, is really quite interesting, and from that perspective that continues to be a pretty high conviction view that we'd want to express.

Otherwise over the course of the last couple of weeks more attention on China the latest initiatives coming out of Beijing have been kind of interesting in terms of maybe Beijing starting to get serious about trying to put some sort of a floor under domestic property prices.

The idea that local governments are going to be buying up the stock of unoccupied housing and condos, I think, may actually help give a bit of a boost to sentiment, but it's a little bit unclear at the moment in terms of the scope of the delivery. How much money is China prepared to put on the table to actually really help drive something of a turnaround in terms of the property market. It's clearly a large problem that they're seeking to deal with which in many respects has got a lot of parallels to us to what we saw in Japan in the late 1990s. But incrementally, it could be that we're starting to turn a corner in China. But I think the jury is still out. We still need to see more at this particular point, and I would say, ostensibly, I think, the fact that under Xi under the centralization of authority under the Chinese Communist party, I feel that this is really crimping the potential GDP in China. Furthermore, I feel that in terms of geopolitics we're moving in a direction where we continue to see rising tariffs on Chinese goods. In Europe, in the US, there's no appetite for absorbing more Chinese imports. So that sort of Beijing can effectively export its way out of a weak economic situation. It really is going to need to deliver more answers domestically. But it is certainly a story that we're looking at with a degree of focus, because there are a number of moving parts here for the time being.

Otherwise, I'd sort of go on to mention that in emerging markets more generally what we continue to see is some ongoing value in local markets in EM. There are a number of countries, I mean you can even highlight the example of Brazil, where inflations at 3 ½, 4 yet you've got sort of bond yields running up around 11%. We think that the levels which are very attractive. At the same time, we do see scope for some EM currencies to come under pressure, particularly as interest rates in some of the emerging markets move lower and move lower more quickly than is the case in the United States, largely because they were much earlier in hiking interest rates in the first place when we think back to 2021. So there will be particular currencies that we're kind of a bit fearful of in terms of a carry unwind and in here thinking around sort of more of a short view in areas like the Colombian peso, we think is still attractive. Otherwise we we've got a somewhat more favourable view in Turkey. We're also slightly more constructive in terms of our thinking around South Africa thinking that the upcoming election there may well be resolved without the Anc. Going into the coalition with the EFF which would be the negative outcome that I think investors want to avoid.

Otherwise just turning to credit in credit markets. We've continued to see credit spread, squeeze tighter over the course of the past month or so the technical has been very strong. There's been effectively an oversupply of government bonds. Government balance sheets continue to keep growing at the same time. Corporate balance sheets are going in the other direction, and net supply of IG and high yield corporate bonds is actually contracting somewhat and at a time when investors are allocating more towards fixed income. This is actually sort of setting up a dynamic that's squeezing spreads a bit tighter. With financial volatility also dropping, the VIX is now down just above 12. These are factors that have helped draw in spreads to a degree and we've now reached levels where it just feels like the valuations start to become a bit of an obstacle for markets to rally. Much further spreads are now really pretty compressed. And it's actually notable that if you look at index yields in terms of benchmarks on European investment grade, for example, you actually see the yield on that benchmark is actually now below the European cash rate, for example and it shows you how far we've travelled. So not sure that we see a big catalyst for spreads to go wider, but we do think it's right that, as spreads continue to compress, you probably want to be booking some profits, selling into some strength. But there are still sectors that stand out like European financials, we still think trade cheap. There are still many issuers that we can point to that we find value in both in sovereigns as well as in the corporate credit space.

So we are a time where we are seeing more dispersion in credit more dispersion in performance of the global economy with different economies, either hiking rates or cutting rates there. There's lots of interesting things to talk about which could easily send markets in pretty decorrelated directions over the course of the months to come. And I think something else to comment here around is where we're sort of seeing some interesting political trends and political divergence. Of course, the upcoming US election is getting a lot of attention. Here, I mean, statistically speaking, the polls are too close to call, albeit we're more inclined to think that in the swing States that really count, it does look like trump is building a bit of a lead. It seemed that the recent court case isn't really doing anything to detract from Trump's popularity. If anything, the reverse could even end up being true. But clearly he's a very divisive figure. The one thing that we've been commenting around US politics, though, as we head towards the election is that were we to see Trump win, if that meant a clean sweep in terms of the House, the Senate and the Presidency, all 3 branches in that situation you could be in a situation where you see more fiscal easing through tax cuts. You could also see sort of tariffs, also a clampdown on immigration. In each of these 3 areas, these would be policies which would be potentially inflationary. At the same time, we know that Trump wants to push interest rates down and so that could create a degree of uncertainty. It certainly would suit the curve deepening theme that we've been speaking to just a little bit earlier. But that's going to be an increasing focus as we sort of move into the second half of the year. And indeed, I think, as we draw towards the election, it's going to be more difficult for the Fed to do very much. And so, although I think Powell would really, secretly, really like to cut interest rates, I'm not sure the data will be good enough in time for him to actually deliver Biden a pre-election tax not tax interest rate gift in terms of a first rate cut.

Otherwise in Europe, politically, also, some interesting developments just to touch on here. We've been sort of meeting policy makers in Brussels as well as those around who have really been trying to push this sort of agenda of looking for a path towards revitalising the European economy through the fiscal channel, citing the need for greater cooperation around security, or even strategically around certain industries needing to rise to the challenge of increased global competitiveness. This is something to watch for, particularly as we go into European elections, and we wouldn't be surprised to see Draghi getting a bigger job. But the problem with this particular platform is, I'm not really sure that the European populace is really ready for much more of a more federalised European future. If anything, politics across Europe continues to go in something of a Populist direction. : We've seen that of course in the Netherlands, where the far-right party, the party under Geert Wilders is now going to be forming part of the Dutch Coalition Government, even though when that party topped the polls it was at the time a lot of other parties were saying they certainly weren't going to go into coalition with it. So we can see how this Populist right wing agenda continues to get some ground.

We've also seen of course, the sad news about the assassination attempt on the Slovak Prime Minister. Even discord at the flipping Eurovision song contest. I mean, that's seen to be a love in. But people seem to have an ability to argue about that as well. But underneath the hood here, I think what we're saying is that there is actually a bubbling up of political volatility in Europe, bubbling up political volatility in the US and in geopolitics, and we know how politics and policy can be big drivers of financial markets.

So, though the macro landscape for the time being looks pretty benign, we're in a world where we think that treasury yields might go sideways. Volatility is relatively low , equity markets are trading just fine, albeit they're probably lacking a catalyst really to push much higher. Although we've got sort of fine sunny weather out the window right now, we know that they're likely to be storms around the corner. We won't say set fair for too long. So, retaining quite a open mind about what the future may bring investing, I think, with discipline is our sort of a thought for the summer.

But otherwise, before I start to repeat myself, I'll probably leave my comments there. Thanks for dialling in, and I'm going to turn, as I mentioned, to questions and check if we have any coming through. So the first question that's come in is a question asking, how long do you think we'll remain in this Goldilocks environment for? Well, great question! I wish I knew the answer for that. One of the things that I have said, though, is that I actually thought that coming in this year in the first half of 2024 what you would probably see is a situation where economic growth remained quite robust. And so that was good news for corporate earnings. At the same time there would be this sort of promise that rate cuts are just around the corner just ahead of us, and that combination of good news today and jam coming tomorrow, I think, is really quite a supportive set of conditions for financial markets. So I haven't been surprised that in the first half of the year the conditions have been fairly benign. I'm perhaps more concerned in the second half of the year that either we could end up with the economy, losing momentum more quickly or alternatively, inflation continuing to misbehave to the point where no interest rates cuts get delivered. Either way, it could be actually a slightly more challenging narrative in the second half, and so I always sort of thought that our baseline has been for one or 2 rate cuts in the second half of the year, and it's been interesting how the market has really moved towards the trajectory that we've had all along. But my thought here is that in in this sort of process as you sort of go down this path. It's a bit of a case on the rate cycle where you buy the rumour, sell the fact. So we're happy being long risk assets for now. We think that over this course of the summer it might actually be time to adopt more of a flat stance. And who knows that there may be a point that that we actually need to think about moving to a more defensive asset allocation?

I don't have any more questions online this time around. I know that the last one of these calls it felt like we filled it with a lot of questions, so I'd left some room and time intentionally, but all of your time is valuable. I'm not going to waste any more of it. But I do hope that you've enjoyed a couple of the insights and perspectives that we've shared today online with you. And please dial again and again this time next month. We'll be hosting these on a monthly basis but for, for here and now I wish you all the very best for the end of May, and hope you enjoy the summer. Thank you very much.