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    Weekly fixed income review: August

    Weekly fixed income review: August

    28 August 2020 Fixed income
    Week to 28 August, 2020
    • The US Federal Reserve (Fed) intimated  it was willing to tolerate higher inflation going forward. In a shift in approach, Fed governor Jerome Powell stated, at the annual policy meeting for major central banks, that the Fed would be comfortable with an inflation rate of over 2% for relatively extended, albeit unquantified, periods. This implies interest rates staying lower for longer, as the Fed attempts to put the US economy back on an even keel. Yields on government bonds rose sharply and the yield curve steepened following the comments.
    • Investors took profits in US Treasury bond positions, as ‘risk-on’ sentiment dominated markets over the week, with global equity markets breaking into new all-time high territory. The announcement that the US and China would honour the ‘phase one’ trade agreement, signed in January, encouraged investors, as did some signs of a peaking in new coronavirus cases in the US and hopes for a COVID-19 vaccine. The 10-year Treasury yield rose close to 0.8% at the end of the week, its highest level since early June
    • German Bunds sold off as risk appetite among investors recovered. The recent marked rally in German Bunds ended and yields rose, as investors were cheered by seemingly improving trade relations between the US and China despite the recent tensions over various matters between the two sides. Rising optimism around a vaccine and the release of the German IFO Institute’s Business Climate Index, which showed further improvement in August, also boosted sentiment.  Yields rose from -0.5% to -0.38%.
    • A long-dated Japanese government bond auction was met with strong demand.  The auction of 20-year government bonds was well covered, at 3.92 times, compared to 3.8 at the last comparable auction. The yields on 20-year JGBs fell below 0.4% at the time of the auction before recovering later in the week; those on 10-year bonds also rose from mid-week, reflecting the global risk-on climate.
    • The Central Bank of India warned banks that there was an urgent and growing need for recapitalisation. The central bank governor Shaktikanta Das stated that, faced with the economic fallout from the COVID-19 pandemic, there was a need for fund raising, especially from state banks and smaller private banks. While some larger banks such as ICICI had already been active in raising capital, other banks should follow suit, according to Governor Das, given the likely rise in bad debt formation over the coming months.
    • In US credit, corporate spreads were unchanged at 130bp as markets entered their late August lull. Markets did react very positively on Thursday to Jerome Powell’s announcement on average inflation targeting. New issuance slowed after hitting an August record of $140bn, with Royalty Pharma, Nordea, and Athene issuing. In euro credit, supply picked up this week, with a total of four hybrid deals (Vodafone, Solvay, OMV and Total).

    Chart of the Week: Selected 10-year government bond yields

    Chart of the Week: Selected 10-year government bond yields

    Source: Bloomberg. Data as at 28 August 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 130bp -1
    Bloomberg Barclays Euro Corporate Index 115bp -1
    Bloomberg Barclays Sterling Non Gilts Index 124bp -1
    Bloomberg Barclays US Corporate High Yield Index 477bp -24
    Bloomberg Barclays Pan-European High Yield Index 436bp -14
    Bond yields (10yr)
    USA 0.75% +12
    Germany -0.41% +10
    Japan 0.04% +1
    UK 0.34% +13
    EquitiesWeek-to-date change
    S&P 500 3,485 +2.6%
    DJ Euro Stoxx 50 3,331 +2.2%
    FTSE 100 6,000 0.0%
    DAX 13,096 +2.6%
    Nikkei 225 23,209 +1.3%
    Currencies
    EUR/USD 1.18 +0.2%
    JPY/USD 106.57 -0.7%
    GBP/USD 1.32 +0.8%
    Commodities
    Brent Crude ($ per barrel) 45.09 +1.7%
    WTI Crude ($ per barrel) 43.04 +1.7%
    Gold ($ per ounce) 1,929.54 -0.6%

    Source: Bloomberg, 28 August 2020. Prices close of business August 27, 2020.

    Economic calendar

    31 August: Eurozone second-quarter GDP
    1 September: US, UK and eurozone manufacturing PMIs
    2 September: US factory orders, eurozone unemployment
    3 September: US, UK and eurozone services PMIs
    4 September: US non-farm payrolls, US unemployment

    Week to 21 August, 2020
    • Demand for US fixed income was strong. The yield on 10-year Treasuries fell from its recent peak of over 0.70% to 0.65% in the face of continuing US-China tensions, rising cases of COVID-19 and relatively sluggish economic data. Minutes from the most recent Federal Open Markets Committee meeting revealed the US Federal Reserve mulled over an official cut to its 2020 economic forecast, suggesting more stimulus may be needed.
    • Record US corporate bond issuance. Corporate spreads widened 3bp to 131bp, as August supply levels reached an all-time high of over $120bn with companies taking advantage of low rates. Notable new issuance included Prudential, ICE, Lilly, Johnson & Johnson and Principal Financial. US investment-grade bond issuance year-to-date has now exceeded the levels for every year going back to 2009, rising above the recent high of 2017, as shown in the chart below.
    • US high-yield attracted strong demand in the second quarter. According to data from eVestment, there were net inflows of over $25bn, reversing a trend of net outflows seen over the past few years. High yield debt has also benefited from rising risk tolerance and the hunt for yield, as demonstrated by the strong rally seen in US C-rated (or below) debt over the past few weeks.
    • Japanese GDP figures were weak as expected with quarterly GDP falling for the third time in succession. Second-quarter GDP fell 7.8% over the quarter and by 27.8% on an annualised basis. The decline saw investors purchase Japanese government bonds, pushing yields on both 10- and 20-year maturities lower.
    • Italian government bond yields fell over the week. 10-year yields fell below 1%, leading to the spread over German bunds falling to approximately 140bp, the lowest since February.
    • The People’s Bank of China made a CNY700bn injection into its economy through one-year loans. This action reflected concern over the health of the recovery, with a renewed rise in coronavirus cases in certain regions, leading to the continued strategy of keeping monetary conditions as easy as possible.

    Chart of the Week: US investment grade bond issuance has already hit a high for 2020 YTD

    Chart of the Week: US investment grade bond issuance has already hit a high for 2020 YTD

     Source: Bloomberg. Data as at 21 August 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 131bp +3
    Bloomberg Barclays Euro Corporate Index 116bp +1
    Bloomberg Barclays Sterling Non Gilts Index 125bp -1
    Bloomberg Barclays US Corporate High Yield Index 502bp +4
    Bloomberg Barclays Pan-European High Yield Index 450bp +6
    Bond yields (10yr)
    USA 0.65% -6
    Germany -0.50% -8
    Japan 0.04% -2
    UK 0.23% -2
    EquitiesWeek-to-date change
    S&P 500 3,386 +0.4%
    DJ Euro Stoxx 50 3,274 -0.9%
    FTSE 100 6,013 -1.3%
    DAX 12,830 -0.6%
    Nikkei 225 22,881 -1.8%
    Currencies
    EUR/USD 1.19 +0.2%
    JPY/USD 105.80 +0.8%
    GBP/USD 1.32 +1.0%
    Commodities
    Brent Crude ($ per barrel) 44.90 +0.2%
    WTI Crude ($ per barrel) 42.58 +1.4%
    Gold ($ per ounce) 1,947.26 +0.1%

    Source: Bloomberg, 21 August 2020. Prices close of business August 20, 2020.

    Economic calendar

    24 August: n/a
    25 August: Eurozone second-quarter GDP, US consumer confidence
    26 August: Japanese leading economic index, US durable goods orders
    27 August: US jobless claims, eurozone industrial orders, Japanese CPI
    28 August: Eurozone CPI, US CPI, US Michigan consumer sentiment index

    Week to 14 August, 2020
    • US Treasury yields rose as investors rotated into equities. Demand for equities coincided with weekly initial jobless claims falling below a million for the first time since the start of the pandemic. There was also the resumption of talks on a new coronavirus stimulus package, as cases continue to rise in the US. The yield on the 10-year benchmark bond rose to 0.72% with some selling pressure came from core inflation picking up from 1.2% in June to 1.6% in July. The US government raised $112bn via auctions of three, 10- and 30-year bonds to help fund fiscal stimulus; the former two auctions (of $48bn and $38bn, respectively) saw strong demand, but the latter (for $26bn) was less well received.
    • The UK economy entered recession. Second-quarter GDP contracted 20.4% sequentially (and 21.7% year-on-year), largely due to a collapse in activity in the service sector as the country entered lockdown. The country suffered the worst slump of any major European economy during the period. However, the economy grew by 8.7% month-on-month in June as government restrictions were gradually eased, with the 10-year gilt yield rising 10bp to 0.24% over the week.
    • The EU’s AAA credit rating is secure for now, according to rating agencies Moody’s and Fitch. This follows the bloc’s plan to issue €750 billion of bonds to fund its Covid-19 recovery fund. This is despite large divisions between member states over how much of the money should be paid as grants or loans.
    • Brazil’s reform agenda has come into question. The sudden departure of two top government officials from Jair Bolsonaro’s administration has cast doubt on economic reforms. The future of finance minister Paulo Guedes is now uncertain. The turbulence comes during a sharp economic slowdown as the country's deaths from Covid-19 exceeds 100,000. Brazilian bonds sold off sharply over the week.
    • US corporate spreads tightened and there was active issuance with new offers from Apple, AES Panama, Ball Corp, Windstream, CVS and Comcast. Notably, US-based aluminium can maker Ball Corporation secured the lowest-ever borrowing costs for a US junk-rated company. It raised $1.3 billion via a 10-year bond issue, paying an annual coupon of 2.875%. The US high yield market has recovered strongly after its sharp sell-off in March and held on to most of those gains, as investors seek income. 

    Chart of the Week: Search for income buoys US high yield despite COVID-19 figures

    Chart of the week: Search for income buoys US high yield despite COVID-19 figures

    Source: Bloomberg. Data as at 14 August 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 126bp 0
    Bloomberg Barclays Euro Corporate Index 115bp -8
    Bloomberg Barclays Sterling Non Gilts Index 126bp -3
    Bloomberg Barclays US Corporate High Yield Index 486bp +7
    Bloomberg Barclays Pan-European High Yield Index 436bp -23
    Bond yields (10yr)
    USA 0.72% +16
    Germany -0.41% +10
    Japan 0.04% +2
    UK 0.24% +10
    EquitiesWeek-to-date change
    S&P 500 3,373 +0.7%
    DJ Euro Stoxx 50 3,343 +2.8%
    FTSE 100 6,186 +2.5%
    DAX 12,994 +2.5%
    Nikkei 225 23,250 +4.1%
    Currencies
    EUR/USD 1.18 +0.2%
    JPY/USD 106.93 -0.9%
    GBP/USD 1.31 +0.1%
    Commodities
    Brent Crude ($ per barrel) 44.96 +1.3%
    WTI Crude ($ per barrel) 42.24 2.5%
    Gold ($ per ounce) 1,953.71 -4.0%

    Source: Bloomberg, 14 August 2020. Prices close of business 13 August 2020.

    Economic calendar

    16 August: Japan second-quarter GDP
    17 August: Japan industrial production (June)
    18 August: RBA meeting minutes; Japanese trade figures (July) 
    19 August: UK, eurozone and Canada consumer price inflation (July); FOMC meeting minutes 
    20 August: US weekly initial jobless claims
    21 August: US, UK and eurozone Markit PMIs (August); Canada retail sales (June)

    Week to 7 August, 2020
    • Benchmark US Treasury yield tumbles. The yield on the 10-year Treasury bond fell to 0.54% over the week against a backdrop of bad and uncertain news; Covid-19 infection rates in the US remain at high levels and both sides of Congress reached a stalemate over fiscal relief, after unemployment benefits expired at the end of July. The gold price also touched a new all-time high.
    • The Bank of England keeps rates at 0.1%. Policymakers maintained asset purchases of £745bn, while keeping the benchmark rate unchanged on 6 August. The bank’s governor, Andrew Bailey, also poured cold water on the idea of negative rates, saying “at the moment, we don’t plan to use them”. The 10-year gilt yield moved as low as 0.07% over the week before recovering, ending the week largely unchanged.
    • Companies benefit from low borrowing costs. Alphabet raised $10bn by issuing bonds across various maturities, securing a coupon of 1.1% on its 10-year paper. Airline company JetBlue also issued over the week. Low borrowing costs are enticing companies to credit markets – some are even rescheduling issuance plans to take advantage.
    • Global credit spreads broadly tightened over the week. In the US, the chase for yield drove demand outweighing the delayed stimulus bill. In Europe, activity was light as the European primary market is closed, due to the earnings season and summer period.
    • Argentina and Ecuador settle with creditors. In emerging markets, Argentina finally agreed the high-level terms of its $65bn debt restructuring, having agreed to make some payments earlier than expected. The agreement followed months of negotiations with creditors, after Argentina defaulted in May. Ecuador, meanwhile, has agreed a $17.4bn restructuring, which entails creditors accepting a write-off of 9%. The deal will give Ecuador a break from capital repayments until 2026.

    Chart of the Week: US spreads (%) continued to tighten

    Chart of the week

    Source: Bloomberg as at 7 August 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 127bp -6
    Bloomberg Barclays Euro Corporate Index 124bp -4
    Bloomberg Barclays Sterling Non Gilts Index 115bp -17
    Bloomberg Barclays US Corporate High Yield Index 476bp -12
    Bloomberg Barclays Pan-European High Yield Index 462bp -14
    Bond yields (10yr)
    US 0.54% +1
    Germany -0.53% -1
    Japan 0.02% 0
    UK 0.11% 0
    EquitiesWeek-to-date change
    S&P 500 3,349 2.4%
    DJ Euro Stoxx 50 3,240 +2.1%
    FTSE 100 6,027 +2.2%
    DAX 12,592 +2.3%
    Nikkei 225 22,418 +3.3%
    Currencies
    EUR/USD 1.19 +0.8%
    JPY/USD 105.55 +0.3%
    GBP/USD 1.31 +0.4%
    Commodities
    Brent Crude ($ per barrel) 45.09 +4.1%
    WTI Crude ($ per barrel) 41.95 +4.2%
    Gold ($ per ounce) 2063.54 +4.4%

    Source: Bloomberg, as at 7 August 2020. Prices close of business August 6, 2020.

    Economic calendar

    10 August: China’s inflation rate (year on year, July)
    11 August: Germany’s ZEW economic sentiment index
    12 August: UK GDP, Q2, quarter on quarter; US core inflation rate
    13 August: US initial jobless claims
    14 August: Euro area growth rate, quarter on quarter; US retail sales (July)

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