Markus Allenspach, Head Fixed Income Research, Julius Baer
The number for new orders for capital goods is notoriously volatile and the bond market normally pays little attention to it. Today, the March figure could be the exception. After a number of positive economic surprises and the very optimistic report from the Congressional Budget Office (CBO), which predicts growth to accelerate to 3.3 per cent this year, the bond market is wary of any confirmation of cyclical strength. In response to the tax reforms and the high level of capacity utilisation in the US industry, the CBO assumes 8.5 per cent growth of business investments this year as the main driver for this stellar growth projection. The durable goods orders report could be one of the first indicators of such a boom in capital spending. When it comes to interpreting the number, readers should focus on the ‘core’ figure excluding defence spending and the aircraft orders.
Money market instruments and Treasury inflation-protected securities a (TIPS) are the best segments in an environment of rising inflationary pressure and accelerating growth. We maintain our negative view on US high-yield bonds given the bear market flattening of the yield curve and the surge in refinancing costs it implies.