The treasury market is continuing to forecast a US recession

US recession could still be on the cards as bond investors continue pessimistic outlook: Investors in US treasuries are still betting that the Federal Reserve’s interest rate hikes will push the country into a recession, despite growing Wall Street optimism to the contrary, reports the Wall Street Journal. Yields on short-term US government bonds continue to far surpass those on long-term bonds, a phenomenon known as the inverted yield curve that has preceded every recession in the past five decades. Past data indicates that the curve un-inverts shortly before a recession, with short-term bond yields falling because the Fed is cutting rates or is close to doing so.

EM bonds are (so far) unscathed by rising US yields: Local-currency emerging-market debt is holding up even as yields rise in the US, as slowing inflation and expectations for easier monetary policy keep investors interested in the asset class, according to Bloomberg. “The disinflation process in emerging markets is proceeding faster than we had previously expected — this should allow EM central banks to cut rates sooner and faster than developed-market ones,” said one strategist. “We remain overweight EM local-currency bonds.”

Expect more pressure in the coming weeks and months as the Fed continues to unwind its balance sheet: The Fed’s balance sheet is expected to have shrunk its balance sheet by USD 1 tn by the end of August, as the central bank continues to reverse the years of easy pandemic-era monetary policy, reports the Financial Times. The bank’s huge bond-buying program in the wake of the pandemic saw its balance sheet balloon to a record USD 8.55 tn, which it is now in the process of reversing as it tightens financial conditions in response to last year’s soaring inflation.

Why is this bad news for bonds? The Fed’s move to so-called quantitative tightening involves it selling back to the market the bonds it purchased from investors to steady the financial system during the crash in March 2020. This will sharply increase the supply of debt, driving up borrowing costs and potentially destabilizing the market.

ALSO- KSA completes bond buyback ahead of maiden sukuk sale : Saudi Arabia has bought back SAR 35.7 bn (USD 9.5 bn) of outstanding debt and will replace it with a SAR 35.9 bn sukuk issuance maturing at later dates, according to Bloomberg. The kingdom has appointed HSBC, Standard Chartered, Emirates NBD and Al Rajhi Capital to manage the issuance.

THE CLOSING BELL-

The EGX30 rose 0.8% at yesterday’s close on turnover of EGP 1.78 bn (10.5% below the 90-day average). Foreign investors were net buyers. The index is up 22.3% YTD.

In the green: Ezz Steel (+5.7%), Alexandria Containers and Cargo Handling (+4.2%), and Beltone Financial Holding (+3.9%).

In the red: Orascom Development Egypt (-1.1%), Juhayna (-0.4%), and B Investments (-0.2%).

Asian markets are starting the week in the red this morning as fears about a Chinese economic slowdown continue. Shares in the US and Europe are on course to fall at the opening bell.