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    Weekly fixed income review: August

    Weekly fixed income review: August

    27 August 2021 Fixed income
    Week to 27 August 2021
    • Bond yields drifted higher over the week, awaiting guidance from US Federal Reserve (Fed) Governor Jerome Powell’s Jackson Hole summit speech. While the market seemed, at times, to be holding its breath in anticipation of Powell’s comments, most investors were not expecting any real change in direction from the Fed. Expectations have grown that the Fed may well begin to taper its bond-purchasing scheme before year-end and Powell could confirm this later today. Liquidity and volumes dried up in the Treasury market this week as a result of the collective anticipation. The US 10-year Treasury yield climbed to 1.35% over the week.Meantime, the US Labour Secretary Marty Walsh suggested that the current rising wave of new COVID-19 cases in the US could have a greater-than-expected negative impact on jobs growth throughout the country.

    • Oil prices surged over the week. After the marked sell-off in oil in the latter half of last week, oil prices recovered strongly this week, with West Texas Intermediate climbing from approximately $62 per barrel to $68, while Brent Crude enjoyed a surge of similar magnitude. Recovering optimism in some quarters regarding the global economic outlook, as well as supply-side issues following the fire in the Pemex offshore rig in the Gulf of Mexico, drove oil prices higher. The recovery in oil prices will likely begin to show up in inflation data published next month, especially in developing countries. Copper and other industrial metals also benefitted from the change in sentiment and this was reflected in the strength of the Refinitiv/CoreCommodity CRB Index which is back close to its six-year high.

    • The UK’s purchasing managers’ index (PMI) slowed in August. The composite PMI fell to its lowest level in six months, declining to 55.3, down from July’s 59.2, albeit still above the 50.0 line that denotes an expansion of private sector business activity. It was the third consecutive month that the composite PMI had fallen. Both the manufacturing and, particularly, service segments of the economy experienced a slowdown, as output and new order growth slowed amid a renewed pickup in COVID-19 cases which has led to staff shortages and a disruption of supply. The gauge of input prices fell from the near 20-year high registered in July.

    • Eurozone government bond yields rose mid-week. Most major eurozone bond markets saw a rise in yields, with German Bunds and Italian BTP yields both experiencing their largest daily rise for almost six months on Wednesday. Concerns over upcoming heavy issuance across the eurozone, as well as some hawkish commentary emanating from European Central Bank (ECB) officials, caused the sell-off. Indeed, there was a suggestion in the comments from the central bank’s chief economist Philip Lane that the ECB was open to lowering the pace of bond purchases at its next policy meeting. In economic news, the German IFO Business Climate Index fell in August, for the second successive month. Not only has the ongoing wave of COVID-19 infections been a factor behind the drop in sentiment, but higher factory gate prices have also had a negative impact as German manufacturers struggle with a shortage of certain materials, not least semiconductors, and supply bottlenecks.

    Chart of the Week: the 10-year German bund yield moved higher (%)

    Chart of the Week: the 10-year German bund yield moved higher (%)

    Source: Bloomberg. Data as of August 27, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 88bp -3
    Bloomberg Barclays Euro Corporate Index 84bp -1
    Bloomberg Barclays Sterling Non Gilts Index 89bp -1
    Bloomberg Barclays US Corporate High Yield Index 296bp -16
    Bloomberg Barclays Pan-European High Yield Index 292bp -3
    Bond yields (10yr)
    USA 1.35% +9
    Germany -0.41% +9
    Japan 0.03% +2
    1UK 0.60% +8
    EquitiesWeek-to-date change
    S&P 500 4,470 0.6%
    DJ Euro Stoxx 50 4,170 0.5%
    FTSE 100 7,125 0.5%
    DAX 15,794 -0.1%
    Nikkei 225 27,742 2.7%
    EUR/USD 1.18 0.5%
    JPY/USD 110.09 -0.3%
    GBP/USD 1.37 0.6%
    Brent Crude ($ per barrel) 71.07 +9.0%
    WTI Crude ($ per barrel) 67.42 +8.2%
    Gold ($ per ounce) 1,792.43 +0.6%

    Source: Bloomberg, August 27, 2021. Prices close of business August 26, 2021.

    Economic calendar

    30 August: UK nationwide housing prices, eurozone consumer confidence, German CPI
    31 August: Japan consumer confidence, UK consumer credit
    01 September: US ADP private jobs report, US ISM manufacturing PMI, China Caixin PMI
    02 September: US initial jobless claims, eurozone PPI, US factory orders
    03 September: US non-farm payrolls, US unemployment, UK, US, eurozone composite PMI  

    Week to 20 August 2021
    • Minutes from the US Federal Reserve’s policy committee meeting indicated the possibility of some tapering by year-end. The Federal Open Market Committee minutes suggested that improving US labor market conditions could pave the way for the tapering of bond purchases by the central bank later this year. The minutes stated: “provided that the economy were to evolve broadly as they (policymakers) anticipated…it could be appropriate to start reducing the pace of asset purchases this year”. The minutes also indicated that tapering would likely be applied proportionally to both Treasuries and mortgage-backed securities. However, the minutes also stated that the labor market, although clearly improving, had not yet reached a level to trigger tapering, implying that an imminent reduction in the US Federal Reserve’s bond-purchasing scheme was unlikely. Global bond yields declined, while stock markets also fell, and the US dollar rose. In other news, US retail sales for July were less than expected, falling 1.1% over the month, but there was better news on employment, with US initial jobless claims falling 348,000, the lowest level since the pandemic began.

    • Debt agencies warned of likely defaults in the US corporate bond market. Debt-ratings firms such as Moody’s and S&P have again highlighted the danger to the market from the recent high levels of issuance in, and commensurate demand for, US corporate debt. The report states that financially weaker companies have issued a total of $650bn in junk bonds year to date, which is on target to exceed the annual record this year.

    • The UK’s inflation rate moderates. Consumer price inflation hit 2.0% on a year-on-year basis in July, down from June’s recent peak level of 2.5%. Base effects had a large influence on this number as inflation picked up markedly in July of last year as the initial lockdown measures began to be eased. The core consumer price index, which excludes food and energy prices, rose 1.8% year on year during July, also down from June’s rate of 2.3%. Meanwhile, employment data released over the week continued to show a recovery in job vacancies, wage growth and unemployment. Job vacancies hit a record high of over 950,000 while average earnings rose at their highest rate since records began 20 years ago. Unemployment continued to tick lower, dropping to 4.7% in the three months to June. The strong data caused some City-based economists to call for an earlier hike of interest rates than the Bank of England is currently contemplating. The 10-year gilt yield, however, continued to edge lower, falling below 0.55%, as traders and investors appeared to be more focused on COVID-19 trends at home and overseas.

    • China held interest rates steady despite the recent economic slowdown. The People’s Bank of China left its one-year and five-year loan prime rates unchanged amid growing expectations that it might boost stimulus in the near-future. Some economists are now discounting a rate cut later in the year. Recent economic data in China has pointed to a slowdown in economic conditions. Industrial production and retail sales figures have disappointed expectations and have come amid a pickup in the Delta variant of COVID-19, soaring raw material prices and floods in parts of the county that threaten future economic growth.

    Chart of the Week: the 10-year Treasury yield drifted lower during the week (%)

    Chart of the Week: the 10-year Treasury yield drifted lower during the week (%)

    Source: Bloomberg. Data as at 20 August 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 91bp +3
    Bloomberg Barclays Euro Corporate Index 84bp 0
    Bloomberg Barclays Sterling Non Gilts Index 89bp 0
    Bloomberg Barclays US Corporate High Yield Index 314bp +5
    Bloomberg Barclays Pan-European High Yield Index 295bp +5
    Bond yields (10yr)
    USA 1.24% -3
    Germany -0.49% -2
    Japan 0.02% -2
    1UK 0.54% -3
    EquitiesWeek-to-date change
    S&P 500 4,406 -1.4%
    DJ Euro Stoxx 50 4,125 -2.5%
    FTSE 100 7,059 -2.2%
    DAX 15,766 -1.3%
    Nikkei 225 27,281 -2.5%
    EUR/USD 1.17 -1.0%
    JPY/USD 109.74 -0.1%
    GBP/USD 1.36 -1.6%
    Brent Crude ($ per barrel) 66.45 -5.9%
    WTI Crude ($ per barrel) 63.69 -6.9%
    Gold ($ per ounce) 1,780.38 +0.0%

    Source: Bloomberg, 20 August 2021. Prices close of business 19 August 2021.

    Economic calendar

    23 August: Eurozone consumer confidence, US, UK and eurozone composite PMIs
    24 August: US new home sales
    25 August: Japan leading economic index, US durable goods orders, German IFO business climate
    26 August: US initial jobless claims, eurozone money supply
    27 August: US trade balance, US personal spending, US Michigan consumer sentiment

    Week to 13 August 2021
    • The US Senate passed a $1trn infrastructure package which will now be taken up by the House of Representatives) and is also debating a $3.5trn budget bill that contains new social programs and climate measures. However, concern has grown that lawmakers may wait until the last minute to increase or suspend the US debt ceiling. The US government’s two-year debt ceiling suspension expired in July. The Treasury is expected to be able to get by until October or later by using extraordinary measures. The risk of an outright default remain small, however, yields on Treasury bills maturing in late October and early November, when the Treasury is most likely to come under funding pressure, have begun to move higher.

    • Two Federal Reserve (Fed) officials suggested that the central bank could soon reduce or taper its asset purchases. Dallas Fed President Robert Kaplan, who is not presently a member of the Federal Open Markets Committee (FOMC), said the Fed should disclose its timeframe for reducing its sizeable bond holdings next month, and start tapering in October. Inflation remains high historically (with annual headline and core CPI in July coming in at 5.4% and 4.3%, respectively) and speculation is growing that Fed Chairman Jerome Powell will give more detail on the timing of tapering at the Jackson Hole meeting of central bankers later this month.

    • The Bank of England (BoE) maintained monetary policy but adopted a more hawkish tone. It signaled modest tightening over the next two years as the economy improves and the unwinding of quantitative easing once rates reach 0.5% (rather than the previously flagged 1.5%). The BoE now sees inflation peaking at 4% in late 2021/early 2022 (versus its previous forecast of 2.5% in May) with GDP still expected to rise 7.25% this year and by 6% next year (up from its prior estimate of 5.75%). The UK economy grew by 4.8% sequentially in the second quarter, which was in line with market forecasts but slightly below the BoE’s own estimate of 5%.

    • German forecasters are split on European Central Banks (ECB)’s ability to raise inflation. The ZEW survey of 147 analysts across the German finance industry showed that 49% of respondents believe the ECB’s new policy, allowing inflation to run above its 2% inflation target for periods of time, would result in their raising their inflation forecasts. 46% of respondents believed the change would have no impact on their inflation forecasts and 5% reduced their forecasts.

    • Producer price inflation in Japan rose by a higher-than-expected 5.6% year-on-year in July due to surging commodity prices. However, the spread of the Delta variant of COVID-19, which has seen Japan declare a state of emergency in Tokyo and a number of major provinces, is expected to have a significant impact on economic activity.

    Chart of the Week: 10-year US Treasury yields rose over the week

    Chart of the Week: 10-year US Treasury yields rose over the week

    Source: Bloomberg. Data as at 13 August 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 88bp 0
    Bloomberg Barclays Euro Corporate Index 84bp +1
    Bloomberg Barclays Sterling Non Gilts Index 89bp -1
    Bloomberg Barclays US Corporate High Yield Index 307bp +6
    Bloomberg Barclays Pan-European High Yield Index 291bp +3
    Bond yields (10yr)
    USA 1.36% +6
    Germany -0.46% 0
    Japan 0.03% +1
    1UK 0.60% -1
    EquitiesWeek-to-date change
    S&P 500 4,461 0.6%
    DJ Euro Stoxx 50 4,226 1.2%
    FTSE 100 7,193 1.0%
    DAX 15,938 1.1%
    Nikkei 225 28,015 0.7%
    EUR/USD 1.17 -0.3%
    JPY/USD 110.41 -0.1%
    GBP/USD 1.38 -0.5%
    Brent Crude ($ per barrel) 71.31 0.9%
    WTI Crude ($ per barrel) 69.09 1.2%
    Gold ($ per ounce) 1,752 -0.6%

    Source: Bloomberg, 13 August 2021. Prices close of business 12 August 2021.

    Economic calendar

    16 August: China retail sales; China industrial production; Japan industrial production
    17 August: UK unemployment rate; US retail sales; US industrial production; Japan trade figures
    18 August: UK CPI; eurozone CPI; US FOMC minutes
    19 August: US initial jobless claims; Japan CPI
    20 August: UK retail sales; UK consumer confidence; PBOC interest rate decision

    Week to 6 August 2021
    • The US Bureau of Labor Statistics’ nonfarm payrolls report will be closely watched today after strong signals from Federal Reserve (Fed) officials that the Fed’s bond-buying programme will begin tapering later this year, with interest rates rising as early as 2023. The US was expected to have added 870,000 jobs outside the agriculture sector in July, up from 850,000 the previous month. Yesterday, the ADP employment report for last month disappointed markets with a reading of 330,000 job additions, well below the consensus forecast of 690,000. There was better news in the jobs section of a separate report from the Institute for Supply Management, which showed an index reading of 53.8 for July, an increase from June and a sign of resumed growth. Fed vice-chair Richard Clarida said that the conditions for increasing the Fed Funds rate will have been met by the end of next year and San Francisco Fed President Mary Daly speculated that the central bank might start tapering bond purchases later this year or next. In bond markets, 10-year Treasury yields ended the week unchanged. In US credit, there was underperformance in energy and highly rated securities as Asian buying slowed materially. There was about $30bn in issuance, led by Westlake, UBS, Yamana, and Mizuho.

    • Bank of England rate-setters on the Monetary Policy Committee voted to keep interest rates on hold at 0.1%, in line with expectations, and maintain the quantitative easing stimulus programme, amid mounting market concerns over rising inflation. Alongside its rates decision, the Bank warned inflation would rise to 4% this year, though it projected a fall back to its 2% target in around two years’ time. The Bank’s moves came as the latest monthly survey from IHS Markit/CIPS showed that construction grew at its weakest pace since February last month due to a shortage of both materials and contractors. The Purchasing Managers’ Index (PMI) fell to 58.7 in July from 66.3 in June, a two-year high. Economists had predicted a reading of 64. Against this backdrop 10-year gilt yields fell.

    • In Europe, the focus was a series of closely followed revisions to PMI surveys. The July reading for the euro area manufacturing sector was revised up to 62.8 from 62.6. This is nevertheless a decline from June’s record high of 63.4. Germany was revised higher, but France, Spain and Italy all disappointed with lower-than-expected readings. The final figure for the services sector was revised down from 60.4 to 59.8. While up from the previous month’s 58.3 the readout was still below expectations. Germany and France, Europe’s two powerhouse economies, both had their final index readings revised down, albeit marginally. The resulting composite reading came in at 60.2, down from the initial 60.6, but still showing the fastest increase in overall economic activity in more than 15 years. Against this backdrop 10-year bund yields fell.

    • Asian markets remained focused on coronavirus cases and concerns that China is poised to unleash a crackdown on the online entertainment industry. The Economic Information Daily, run by the official Xinhua News Agency, ran commentary that described online gaming as a “spiritual opium” sparking worries that the sector might become Beijing’s latest target after its move to tighten the rules in the property, education and technology sectors. Separately, China is not expected to slow its fiscal spending programme aimed at stimulating the economy and is predicted to accelerate its issuance of local government special bonds during the second half of the year. Official Chinese manufacturing PMIs showed an index reading of 50.4 in July, down from 50.9 in June and the lowest readout since February 2020 when the country was at the peak of its COVID-19 pandemic. The Caixin manufacturing PMI also showed a fall to 50.3 last month, from 51.3 in June. 

    Chart of the Week: US 10-year Treasury yields ended the week unchanged

    Chart of the Week: US 10-year Treasury yields ended the week unchanged

    Source: Bloomberg. Data as at 5 August 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 88bp +2
    Bloomberg Barclays Euro Corporate Index 84bp +1
    Bloomberg Barclays Sterling Non Gilts Index 89bp -1
    Bloomberg Barclays US Corporate High Yield Index 304bp +10
    Bloomberg Barclays Pan-European High Yield Index 291bp -6
    Bond yields (10yr)
    USA 1.22% +0
    Germany -0.50% -4
    Japan 0.01% -2
    1UK 0.52% -4
    EquitiesWeek-to-date change
    S&P 500 4,429 0.8%
    DJ Euro Stoxx 50 4,161 1.8%
    FTSE 100 7,120 1.3%
    DAX 15,745 1.3%
    Nikkei 225 27,728 1.6%
    EUR/USD 1.18 -0.3%
    JPY/USD 109.74 0.0%
    GBP/USD 1.39 0.2%
    Brent Crude ($ per barrel) 71.29 -6.6%
    WTI Crude ($ per barrel) 69.09 -6.6%
    Gold ($ per ounce) 1,807.00 -0.4%

    Source: Bloomberg, 06 August 2021. Prices close of business 5 August 2021.

    Economic calendar

    9 August: Germany trade balance; US JOLT job openings; UK BRC retail sales
    10 August: Australia new home sales; China foreign direct investment; EU ZEW Economic sentiment survey
    11 August: EU Harmonised CPI; US CPI; US monthly budget statement
    12 August: UK Q2 GDP (prelim); EU industrial production; US Initial jobless claims
    13 August: Eurozone ILO Unemployment; EU Trade balance; US Baker Hughes oil rig count

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