image image

    Weekly fixed income review: February

    Weekly fixed income review: February

    09 February 2024 Fixed income
    Week to 09 February 2024
    • US Treasury yields at two-month highs. Both the 10-year and two-year yield were up about 10bp over the week, to 4.15% and 4.46% respectively, their highest levels for almost two months. This followed comments from Federal Reserve Chairman Jerome Powell reinforcing the message that rate cuts were unlikely in March. The market is now pricing in 100-125bp of rate cuts this year, down from 150bp a few weeks ago, with March’s potential rate cut effectively ruled out. In separate comments, several regional Fed presidents backed up this view, with Cleveland Fed President Loretta Mester stating that there was “no need to rush” to cut rates. The US Treasury launched its largest single auction of 10-year government bonds ($42bn) at a lower-than-expected average yield of 4.093%, an indication of solid demand from institutions.

    • Munis yields rise. Muni rates opened the week higher moving with US Treasuries in reaction to the stronger than expected non-farm payroll report and Fed rhetoric. Tax-exempt AAA yields were up 8-12bp for the week. As the week progressed, the market tone stabilized and then shifted in a somewhat positive direction on Thursday as investors with cash were attracted to the higher yields. Yield ratios were essentially unchanged for the week at 61% in two years, 58 % in five years, 58% in 10-years and 82% in 30 years. Light primary issuance bolstered the market. In a reversal after several positive sessions, fund flows though turned negative at $121 million as ETF outflows of $443 million offset open end mutual fund inflows of $322 million. Next week’s calendar is again limited at only $4.1 billion. The AAA tax-exempt yield in 10 years is a 2.43% and AA rated taxable munis are yielding 4.84 %.

    • European Central Bank's (ECB) caution on rate cuts leads to higher eurozone yields. The German 10-year bund yield rose 7bp to 2.32% over the week; the Italian 10-year BTP climbed to 3.90%, while the French 10-year OAT traded up to 2.9%. ECB policymaker Isabel Schnabel warned that inflation could "flare up again" and as such it was too risky to lower rates now. She pointed to average wage growth of around 5% across the eurozone, which she said could lead to a rise in headline inflation.

    • UK 10-year gilt yield moves back above 4%. Gilt yields followed other major global bond yields higher. The 10-year gilt yield rose 13bp to 4.05%. Short-dated gilt yields also increased, but longer-dated yields barely moved, with the 30-year yield hovering around 4.60%. January’s services purchasing managers’ index was revised higher from 53.8 to 54.3, its highest level for eight months, in signs of accelerating business activity in the service sector.

    • China’s stock market incentive hits bond yields. The 10-year government bond yield increased to 2.45% from 2.40% over the week after the government’s announced support measures for the country’s stock market, encouraging domestic institutions to buy local stocks. Data released over the week showed that price deflation was in its longest downturn for over 14 years, with January’s inflation hitting -0.8% marking the fourth month in succession of negative inflation.

    Bloomber table 02-02-24

    Source: Bloomberg, February 09, 2024. Prices close of business February 08, 2024.

    Economic calendar

    12 Feb: Japan PPI.
    13 Feb: US CPI, UK unemployment, UK wages, China CPI, eurozone economic sentiment.
    14 Feb: UK CPI, PPI and RPI, eurozone industrial production.
    15 Feb: UK industrial production and trade balance, eurozone trade balance, US industrial production and initial jobless claims.
    16 Feb: US PPI, consumer sentiment and housing starts, UK retail sales.

    Week to 02 February 2024
    • Treasury yields ease despite Federal Reserve caution on near-term rate cuts. Having risen above 4.15% late last week, the 10-year Treasury yield fell below 3.9% this week. Yields had jumped briefly on Fed Chairman Jerome Powell’s statement that rates were unlikely to be cut in March. However, yields continued to fall shortly afterwards as Powell reassured investors that the outlook for inflation and employment had improved and rate cuts were likely later in the year. The Fed left rates unchanged at its most recent conference – as widely expected – marking the fourth consecutive meeting without rate movements.

    • UK gilts rally as the Bank of England (BoE) cut its inflation forecast. The 10-year gilt yield fell from over 4.0% at the end of last week to below 3.8%. Short rates fell by less, leading to a widening in the negative spread between 10-year and two-year gilt yields of nearly 15bp to 50bp. The BoE made no change to the level of interest rates, as had been expected by the market. The accompanying statement acknowledged that inflationary risks were much more balanced but cautioned that monetary policy would need to remain restrictive for now to reduce inflationary pressures. The BoE did, however, lower its inflation forecast for this year.

    • Eurozone bond yields fall over the week before rallying due to declining inflation data. The German 10-year Bund yield dropped over 15bp to below 2.15% by late Thursday, before recovering on Friday, following data that showed January’s eurozone core inflation falling (to 3.3% from 3.4%) but remaining above market expectations. Headline inflation in the eurozone also eased marginally from 2.9% to 2.8% and was in line with expectations. Elsewhere, data showed that eurozone governments raised a total of €73bn in January directly from investors – a record level for syndicated loans – and reflective of huge investor appetite ahead of likely central- bank rate cuts later this year.

    • Chinese bond yields fall to multi-year lows. The 10-year benchmark yield declined to a 22-year low of approximately 2.45%. Short rates also fell, with the two-year yield falling below 2.1% – still some way above the low of 1.3% set in early 2020. Investors have been favoring local bonds and shunning equities because of the travails of the property market, exemplified by the pending liquidation of Evergrande – China’s second-largest property developer – and the fragile state of the economy. Consequently, expectations have risen that the People’s Bank of China will institute further policy easing measures in addition to the measures its already taken.

    • Munis strengthen over the week. Munis finished the week strongly as rates fell 15 to 20 basis points across the curve, modestly outperforming US Treasuries through five-years, essentially moved with governments in 10 years and lagged slightly on the long end. Ratios stood at 61% in two-years, 60 % in five-years, 59% in 10-years and 83% in 30-years. The primary calendar saw strong demand especially for issues with some yield such as the $300 million RI Lifespan Obligated Group (BBB+). Market tone is being supported by February’s $32 billion in monthly reinvestment needs and significant existing cash balances. Lending further support are industry fund flows which were again positive coming in at a $1.5 billion. Open-ended fund inflows totaled $659 million (21 straight sessions) with ETF’s garnering $817 million. Next week’s calendar totaling $5.9 billion is comprised of $3.8 billion in negotiated and $2.1 billion competitive issues, respectively. The AAA tax-exempt yield in 10 years is a 2.28% and AA rated taxable munis are yielding a 4.58 %.

    Bloomber table 02-02-24

    Source: Bloomberg, February 02, 2024. Prices close of business February 01, 2024.

    Economic calendar

    05 Feb: US, eurozone and UK (final Jan) PMIs, Germany trade balance.
    06 Feb: UK and eurozone retail sales, Germany factory orders.
    07 Feb: Japan leading economic index, US trade balance, Germany industrial production.
    08 Feb: China CPI and PPI, US initial jobless claims, ECB economic report.
    09 Feb: Fed monetary policy report, Germany CPI.

    Back to top