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    Weekly fixed income review: January

    Weekly fixed income review: December

    21 January 2022 Fixed income
    Week to 21 January 2022
    • Inflation fears hit markets, causing a sell-off in both bond and equity markets. Global bond and equity markets retreated as they adjusted to the prospect of more immediate and greater monetary tightening than previously expected. Tight supply conditions for oil were exacerbated by an attack by Yemeni rebels on oil facilities in the United Arab Emirates, which darkened investors’ moods further; Brent crude hit a more than seven-year high of approximately $89 per barrel. The US dollar strengthened on expectations that the US Federal Reserve (Fed) would soon move to raise rates (with March now seen as a certainty according to Fed funds futures) and as investors sought out safer currency holdings as geopolitical uncertainties resurfaced. The US 10-year Treasury yield rose to its highest level in just over two years, climbing towards 1.90%, before falling back. Yields on short-dated bonds also increased, with that on two-year Treasuries topping 1%. Moreover, bond yields increased across the world. The 10-year German Bund yield rose back into positive territory during the week, hitting 0.1%, its highest level – and the first time it had been above 0% – since the spring of 2019.

    • UK inflation soars. The annual consumer price index rose 5.4% year on year, ahead of market forecasts and up from November’s 5.1% rate. Rising food, petrol and household energy costs drove the headline figure higher. Expectations have grown that headline inflation could hit 7% in April. Meanwhile, core inflation, which excludes energy and food prices, also jumped 4.2% on an annual basis, up from 4.0% in the previous month. The market now fully expects a further rate hike from the Bank of England following February’s Monetary Policy Committee meeting. The 10-year gilt yield rose above 1.2%, the highest level since February 2019.

    • Eurozone inflation marked a new high level. Annual inflation in the euro area (according to preliminary figures) increased to 5.0% in December, a new high, up from 4.9% in November and just 0.9% in January 2021. Despite the rising headline inflation rate, the European Central Bank (ECB) is not expected to alter its current relatively loose monetary policy. Indeed, ECB President Christine Lagarde commented during the week that the ECB had “every reason to not react as quickly” as the Fed. This stance has seen the yield spread between two-year US and German bonds rise to over 160bp, the highest level since the pandemic began.

    • China cut rates during the week. The People’s Bank of China cut the rate on both its one-year medium-term lending facility to banks and its one-year and five-year loan prime rates by between 5-10bp, as concerns about the pace of domestic growth and debt issues within the local property market deepened. Fourth-quarter GDP rose 4.0% year on year and although this was slightly above market predictions, it marked the weakest growth rate for six quarters. It was the first cut in the medium-term loan prime rate since April 2020. The move follows recent reductions in short-term rates and banks’ reserve requirement ratios. The market expects further rate cuts from the central bank in the coming months.

    Chart of the Week: The US 10-year Treasury yield rose to its highest level in nearly two years (%)

    Chart of the Week: The US 10-year Treasury yield rose to its highest level in nearly two years (%)

    Source: Bloomberg. Data as at 21 January 2022.

    Bond spreads (over govts) Week-to-date change (bp)
    Bloomberg US Corporate Index 98bp +2
    Bloomberg Euro Corporate Index 99bp +1
    Bloomberg Sterling Non Gilts Index 95bp +1
    Bloomberg US Corporate High Yield Index 298bp +5
    Bloomberg Pan-European High Yield Index 315bp +10
    Bond yields (10yr)
    USA 1.80% +2
    Germany -0.02% +2
    Japan 0.15% +0
    UK 1.23% +8
    Equities Week-to-date change
    S&P 500 4,483 -3.9%
    DJ Euro Stoxx 50 4,300 0.6%
    FTSE 100 7,585 0.6%
    DAX 15,912 0.2%
    Nikkei 225 27,773 -1.2%
    Currencies
    EUR/USD 1.13 -0.9%
    JPY/USD 114.11 0.1%
    GBP/USD 1.36 -0.5%
    Commodities
    Brent Crude ($ per barrel) 88.38 +2.7%
    WTI Crude ($ per barrel) 86.90 +3.7%
    Gold ($ per ounce) 1,839.29 +1.2%

    Source: Bloomberg, 21 January 2022. Prices close of business 20 January 2022.

    Economic calendar

    24 January: US, UK and eurozone (preliminary) composite PMI
    25 January: US housing prices, German IFO business climate
    26 January: Japan leading economic index, US trade balance
    27 January: US Q4 GDP, US durable goods orders, US initial jobless claims, Japan CPI
    28 January: Eurozone economic sentiment, US Michigan consumer sentiment

    Week to 14 January 2022
    • US inflation at its highest since 1982.Annual US consumer price inflation rose to 7% in December, the highest rate since mid-1982. Excluding volatile food and energy prices, core inflation was up 5.5%, its highest for just over 30 years. The market currently expects four rate hikes in 2022, up from three at the turn of the year, with the first in March - Fed funds futures are currently pricing in over 90% likelihood of a March hike. Federal Reserve Chairman Jerome Powell said he is prepared to go further to ensure that inflation does not become entrenched over the mid-to-long term. Consequently, the yield on two-year and five-year Treasury yields hit their highest levels for nearly two years, while the 10-year Treasury yield declined to 1.7%. Corporate spreads were 4bp wider at 96bp as high issuance and higher rates caused some selling in the secondary market.

    • UK consumer cash levels fall. The rise in the cost of living has reduced consumer cash levels to their lowest level in eight years, according to a survey carried out by UK insurer Scottish Widows, which shows more income is being consumed by rising energy and food costs. Another survey jointly produced by financial services firm KPMG and the British Retail Consortium, painted a similar picture, highlighting how consumer spending will be badly impacted by rising inflation, tax increases and higher energy bills.

    • Bunds edge towards positive. The German 10-year Bund yield ended the week close to positive territory at -0.02%, its highest level since May 2019. The rise came as unemployment in the eurozone dropped further in November to 7.2%, the lowest figure since March 2020, and down from October’s 7.3% and the 2021 high of 8.2%. Another positive data point was eurozone industrial production which climbed 2.3% over the month in November following three successive months of contraction.

    • Inflationary pressure in China moderated. Annual consumer price inflation in China declined to 1.5% from 2.3% in the previous month, while the rate of producer price inflation fell from 12.9% to 10.3%. The moderation in prices reflected falling food costs, especially pork, as well as some success by the Chinese authorities in improving the procurement of key parts and commodities. The decline led to some speculation that the People’s Bank of China could further loosen monetary policy, following recent cuts to the one-year loan prime rate and major banks’ reserve requirement ratios.

    • The World Bank downgraded its outlook for the global economy. The World Bank expects economic growth to slow from 5.5% in 2021 to 4.1% in 2022, then to 3.2% in 2023, as the lingering effects of the global pandemic persist, leading to a slowdown in the recovery.

    Chart of the Week: US treasuries reprice as rate hike certainty grows

    Chart of the Week: US treasuries reprice as rate hike certainty grows

    Source: Bloomberg. Data as at 14 January 2022.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 96bp +4
    Bloomberg Euro Corporate Index 97bp +3
    Bloomberg Sterling Non Gilts Index 93bp -1
    Bloomberg US Corporate High Yield Index 293bp -5
    Bloomberg Pan-European High Yield Index 305bp +5
    Bond yields (10yr)
    USA 1.70% -6
    Germany -0.09% -5
    Japan 0.13% -1
    UK 1.11% -7
    EquitiesWeek-to-date change
    S&P 500 4,659 -0.4%
    DJ Euro Stoxx 50 4,316 0.2%
    FTSE 100 7,564 1.0%
    DAX 16,032 0.5%
    Nikkei 225 28,489 0.0%
    Currencies
    EUR/USD 1.15 0.8%
    JPY/USD 114.20 1.2%
    GBP/USD 1.37 0.9%
    Commodities
    Brent Crude ($ per barrel) 84.47 +3.3%
    WTI Crude ($ per barrel) 82.12 +4.1%
    Gold ($ per ounce) 1,822.54 +1.4%

    Source: Bloomberg, 14 January 2022. Prices close of business 13 January 2022.

    Economic calendar

    17 January: China retail sales
    18 January: UK unemployment, eurozone economic sentiment, Japan industrial production
    19 January: UK CPI, PPI and RPI, US housing starts
    20 January: Eurozone CPI, Japan CPI, US initial jobless claims
    21 January: UK retail sales, UK consumer confidence, eurozone consumer confidence

    Week to 7 January 2022
    • Treasury yields rose over the week as the prospect of monetary policy tightening cast a shadow over markets. Bonds sold off in the first full week of the year, as market expectations grew that the US Federal Reserve (Fed) would signal a rate hike as early as March, once the monthly bond-purchasing scheme had been fully tapered. The 10-year bond yield rose above 1.7%, its highest level since April. Minutes released from the December Federal Open Market Committee meeting indicated that policymakers have more clearly converged around the view that inflation pressures will likely be more persistent than had previously been expected and require a more immediate response. A move towards shrinking the Fed’s $8trn-plus balance sheet was also discussed. Additionally, the minutes alluded to the “very tight” labour market, a point underlined by the release of the ADP private jobs report which saw 807,000 new jobs created in the US economy in December, more than double the amount that had been predicted. Meanwhile, daily new cases of COVID-19 in the US exceeded 1m early in the week, a worldwide record for this pandemic.

    • Eurozone bond yields spiked higher. Euro area bond markets sold off in the first week of the new year as fears about monetary policy tightening spooked investors. The release of the Fed’s policy meeting minutes for December clearly indicated a more hawkish mindset among US policymakers. This has come against a backdrop of the European Central Bank (ECB) tapering its Pandemic Emergency Purchase Programme and has led to market consensus expectations beginning to indicate an interest rate hike by the ECB later this year. The German 10-year Bund yield rose to -0.05%, its highest level for over two-and-a-half years, while the Italian 10-year BTP yield climbed to 1.3%, its highest level since July 2020.

    • Italy and Slovenia were the first eurozone countries to raise debt in 2022. Italy raised €7bn through a 30-year sovereign debt issue and received €55bn of demand, with investors attracted by an average yield of 2.16%, despite political uncertainty ahead of a presidential election later in the month.  Slovenia raised €1.75bn in short and long-dated paper. Net supply levels are expected to slowly climb through the year, as eurozone nations issue further debt to underwrite fiscal expansion, especially at a time when the ECB is gradually reducing its bond purchases.

    • Chinese property developer Evergrande’s woes continue. Evergrande was reported to have missed payments on another offshore bond, amounting to approximately $250m, while it became apparent that it was also looking to delay payments on an onshore bond issue, issued by a subsidiary. Further, it appears that the company has been ordered to demolish several residential buildings on the resort island of Hainan; this led to the suspension of its shares although trading was reinstated later in the week. 

    Chart of the Week: the 10-year US Treasury yield rose on the prospect of monetary policy tightening (%)

    Chart of the Week: the 10-year US Treasury yield rose on the prospect of monetary policy tightening (%)

    Source: Bloomberg. Data as at 7 January 2022.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 92bp 0
    Bloomberg Euro Corporate Index 95bp 0
    Bloomberg Sterling Non Gilts Index 95bp -1
    Bloomberg US Corporate High Yield Index 293bp +10
    Bloomberg Pan-European High Yield Index 301bp -10
    Bond yields (10yr)
    USA 1.72% +21
    Germany -0.06% +12
    Japan 0.12% +5
    UK 1.16% +19
    EquitiesWeek-to-date change
    S&P 500 4,696 -1.5%
    DJ Euro Stoxx 50 4,325 0.6%
    FTSE 100 7,450 0.9%
    DAX 16,052 1.1%
    Nikkei 225 28,488 -1.1%
    Currencies
    EUR/USD 1.13 -0.6%
    JPY/USD 115.83 -0.6%
    GBP/USD 1.35 0.0%
    Commodities
    Brent Crude ($ per barrel) 81.99 +5.4%
    WTI Crude ($ per barrel) 79.46 +5.7%
    Gold ($ per ounce) 1,791.16 -2.1%

    Source: Bloomberg, 7 January 2022. Prices close of business 6 January 2022.

    Economic calendar

    10 January: Eurozone unemployment and investor confidence
    11 January: UK retail sales, Japan leading economic index
    12 January: China CPI and PPI, US CPI, eurozone industrial production
    13 January: US PPI and initial jobless claims, Japan PPI
    14 January: UK industrial production and trade balance, US retail sales and industrial production

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