Heavyweight backing bodes well for fixed income

Do not pick fights with people that are a lot bigger than you are: old-fashioned playground rules are not lost on the market.

China is allowing its banks to lend more; the US Fed is buying Treasuries hand over fist; the ECB is lending money through the long-term refinancing operation (LTRO); the Bank of England may still embark on another bout of quantitative easing; Brazil cut interest rates by 50 basis points; and February’s LTRO could be another big number.

It is the equivalent of getting in the ring with Muhammad Ali, Joe Louis, Max Schmeling, Henry Cooper and Everton Lopes, all at the same time. Add to that, the IMF is looking to boost its lending capacity. This is one hell of a money-weight to fight against.

Portugal, Germany, France and Spain have all had successful auctions – at this run rate, most of the eurozone sovereigns will have pre-funded half way through the year.

As a result of all of this, credit has performed well and demand continues for high yield and emerging market bonds. In the bank space, a lack of issuance, other than covered bonds, has seen sub and senior bank spreads come tumbling down. Add to this the number of tenders, and it is clear what is helping subordinated debt to perform.

LTRO funding is currently picking up the slack – another indirect consequence of the ECB's plan. All in all, things are certainly looking rosier, and confidence abounds – clearly, this is a worry, as we all look for narratives to frame our views, or the risk of confirmatory bias that the bull market is back.

And why not when the rosier side of life is so much easier? US data continues to be good, and the Federal Open Market Committee’s statement also gave all markets a boost. The communiqué stated that rates are going to be on hold though to late 2014, contingent on economic conditions. They also signalled further willingness to expand the balance sheet, should conditions warrant it. Risk assets loved it, Treasuries rallied.

But we shouldn’t forget that UK unemployment rose to a 17-year high, and fourth-quarter GDP is fuelling fears of a recession. It could be worse; it could be Europe. Portuguese credit default swap spreads hit a juicy new high, and despite rumours to the contrary, we are still waiting for the Greek debt negotiations to be resolved. Still plenty to keep us on our toes.

Bryn Jones is fixed income director at Rathbone Unit Trust Management. The views expressed here are his own.