Since November 2016 we have taken the view, that long term interest rates are set to rise. We believed the Trump administration would enact expansionary fiscal policies. With the economy near full employment and wage pressures rising, the stage is set for inflationary expectation to rise. At the same time the Fed’s policy is on a tightening cycle. Taken together all these factors suggested that long term interest rates were bound to rise. Yet, not only has this not happened, but long term rates declined this year.

Two months before its due date, the USD 2.1bn PDVSA bond maturing in April 2017 was trading at 36 cents to the dollar, a sign that Venezuela was about to default. However, against all odds, on April 6th, PDVSA paid and bondholders got their hopes up again. Just two months later, investors renewed their concerns over Venezuela’s ability to pay. Fund managers are swapping their short dated bonds for longer ones and most of them see a debt restructuring as an unavoidable outcome. So what has changed?

Since the Brexit referendum last June, economic fundamentals have defied expectations of a sharp slowdown. Despite considerable policy uncertainty, consumer spending remained buoyant, industrial activity and business investment held up well.