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    Weekly fixed income review: February

    Weekly fixed income review: February

    19 February 2021 Fixed income
    Week to 19 February 2021
    • The US 10-year Treasury yield rose to its highest level for a year.A ‘risk-on’ stance from investors saw bond yields in the US, and other global bond markets, rise materially. The 10-year Treasury yield rose to its highest level since late February of last year. Growing optimism regarding a US economic recovery, given Joe Biden’s planned $1.9trn stimulus package, rising COVID-19 vaccinations and strong corporate earnings, drove yields higher. However, the minutes from the Federal Open Market Committee’s January meeting stated that economic conditions were “far from the committee’s longer-run goals” and that the Federal Reserve’s monetary stance would remain accommodative.

    • The UK inflation rate picked up.Consumer price inflation rose by 0.7% on an annual basis in January, led by higher pricing in household goods and furniture, while food price deflation eased a little. As long-term inflation expectations increased, the 10-year gilt yield rose above 0.6% over the week, its highest level since March 2020. Growing optimism regarding economic recovery, as the rate of vaccination continues to exceed expectations, was an additional factor driving yields higher, although real yields in the UK continue to be negative.

    • The German yield curve steepened.The 2-year/10-year part of the curve steepened to its highest level for almost a year, reflecting rising investor optimism towards the economy. Also, 10-year bund yields touched -0.33%, the highest level since early June of last year, before consolidating a little lower. Minutes from the European Central Bank’s January policy meeting indicated some concern over rising bond yields and their potential impact on stock markets, while also giving comfort that “ample monetary stimulus remained essential to preserve favourable financing conditions over the pandemic period”.

    • Italian bond yields rose as Draghi promised reforms.The Italian bond market also experienced rising bond yields as investors became more optimistic on the growth outlook in Italy. This largely reflected increased confidence in new prime minister Mario Draghi and his reformist agenda, aimed at turning around the underperforming Italian economy and cutting bureaucracy in the public sector. Meanwhile, a new €10bn government bond issue was met with record demand, at an average yield of 0.604%, lower than had been anticipated.

    • High levels of junk bond issuance continued to flood the US market.According to data from Refinitiv, since the start of the year, the greatest activity in the high yield segment of the market has come from the lowest-rated companies, with a rating of ‘CCC’ or lower. Totalling 15-20% of the entire high yield market, issuance from such low-rated companies is at its highest since 2007. The low level of interest rates and high demand from investors for high-yielding instruments have helped to provide the conditions for such sizeable junk bond issuance.

    Chart of the Week: 10-year Gilt yield (%)

    Source: Bloomberg. Data as at 19 February 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 88bp -4
    Bloomberg Barclays Euro Corporate Index 87bp -1
    Bloomberg Barclays Sterling Non Gilts Index 90bp -1
    Bloomberg Barclays US Corporate High Yield Index 321bp -2
    Bloomberg Barclays Pan-European High Yield Index 305bp -7
    Bond yields (10yr)
    USA 1.30% +9
    Germany -0.35% +8
    Japan 0.10% +3
    UK 0.62% +11
    EquitiesWeek-to-date change
    S&P 500 3,914 -0.5%
    DJ Euro Stoxx 50 3,681 -0.4%
    FTSE 100 6,617 0.4%
    DAX 13,887 -1.2%
    Nikkei 225 30,236 2.4%
    Currencies
    EUR/USD 1.21 -0.2%
    JPY/USD 105.69 -0.7%
    GBP/USD 1.40 0.9%
    Commodities
    Brent Crude ($ per barrel) 63.93 +2.4%
    WTI Crude ($ per barrel) 60.52 +1.8%
    Gold ($ per ounce) 1,775.67 -2.7%

    Source: Bloomberg, 19 February 2021. Prices close of business 18 February 2021.

    Economic calendar

    22 February: German business climate
    23 February: UK unemployment, eurozone CPI, US consumer confidence
    24 February: US new home sales
    25 February: Eurozone consumer confidence, Japan CPI, US initial jobless claims
    26 February: UK nationwide house prices, US trade balance, US Michigan consumer sentiment

    Week to 12 February 2021
    • Lower-than-expected US inflation drove Treasury yields lower.Consumer price inflation in the US rose by 1.4% over the year in January, a little below market expectations, and matching December’s growth rate. Food prices were higher but apparel prices fell, while gasoline prices were sharply lower. Yields fell across the curve, and by more at the short end; 30-year Treasury yields had briefly topped 2% at the beginning of the week, the highest level for a year, before falling back. Bond investors were encouraged by US Federal Reserve Chairman Jerome Powell’s reiteration, in a speech to the Economic Club of New York, that interest rate hikes would not be considered until the inflation rate rose and stayed above 2% for some time.

    • The European Central Bank (ECB) called for fiscal spending in the eurozone to continue well into 2022.Christine Lagarde, president of the ECB, stated that eurozone states cannot take risks with their economies and start to taper their fiscal budgets this year or next. This reflects the reality that much of the eurozone will remain under lockdown for several more months, given the slow rollout of COVID-19 vaccines as well as the growing prevalence of mutant strains of the virus. She called the EU to make a greater effort to get the €750bn budget, agreed last year, moving and utilised.

    • Italian bond yields touched an all-time low.The 10-year BTP bond yield fell to 0.44% during the week, matching the level seen late last year, as investors were encouraged by political developments in Italy. Former president of the ECB, Mario Draghi, is expected to be confirmed as the country’s next prime minister and usher in much-needed reforms, which could unlock some of the EU’s €750bn coronavirus recovery budget. Italy is expected to issue up to €9bn of debt in the next few days, following large issues from the Spanish (€5bn) and Portuguese (€3bn) governments this week, which attracted very strong demand.

    • UK consumer spending fell over 16% in January. The monthly fall of 16.3% was the weakest figure for seven months and reflected the impact of January’s nationwide lockdown. While online and supermarket sales were strong, department store sales and spending in restaurants and pubs were down sharply. Ten-year gilt yields fell marginally over the week, down from the 12-month peak of 0.53% achieved at the end of last week.

    • Chinese bank loans reached a record high in January.Chinese commercial banks lent a total of ¥3.58trn in January, up 7.2% year-on-year, and the highest monthly level ever recorded. This figure partly reflects seasonal demand, which is high at the beginning of the year. However, it also reflects the economy’s recovery to a level that is now above that recorded before the pandemic. This may lead to greater tightening from the monetary authorities, who have already been gradually reducing liquidity in the money markets.

    Chart of the Week: 10-year Italy yield (%)

    Source: Bloomberg. Data as at 12 February 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 92bp -1
    Bloomberg Barclays Euro Corporate Index 88bp 0
    Bloomberg Barclays Sterling Non Gilts Index 91bp -1
    Bloomberg Barclays US Corporate High Yield Index 326bp -7
    Bloomberg Barclays Pan-European High Yield Index 313bp -5
    Bond yields (10yr)
    USA 1.16 -0
    Germany -0.46 -1
    Japan 0.08 +2
    UK 0.47 -1
    EquitiesWeek-to-date change
    S&P 500 3,916 0.8%
    DJ Euro Stoxx 50 3,672 0.4%
    FTSE 100 6,529 0.6%
    DAX 14,041 -0.1%
    Nikkei 225 29,563 2.7%
    Currencies
    EUR/USD 1.21 0.7%
    JPY/USD 104.75 0.6%
    GBP/USD 1.38 0.6%
    Commodities
    Brent Crude ($ per barrel) 61.14 +3.0%
    WTI Crude ($ per barrel) 58.24 +2.4%
    Gold ($ per ounce) 1,825.51 +0.6%

    Source: Bloomberg, 12 February 2021. Prices close of business 11 February 2021.

    Economic calendar

    15 February: Japan and eurozone industrial production
    16 February: China trade balance, eurozone Q4 GDP, eurozone unemployment
    17 February: UK CPI, US retail sales, US PPI, US industrial production
    18 February: US initial jobless claims, eurozone consumer confidence, Japan CPI
    19 February: UK consumer confidence, UK retail sales, US, UK, eurozone PMI

    Week to 5 February 2021
    • Non-farm private payrolls recovered in the US in January. Figures from the ADP National Employment Report showed 174,000 new jobs in the private sector. Meanwhile, the impasse in Congress regarding Joe Biden’s $1.9trn stimulus package seemed to be thawing as the Senate voted on pushing ahead with the spending plan, despite opposition from Republicans who wish to reduce the size of the programme. Bond yields rose over the week, with the 10-year Treasury yield climbing back above 1.10% and close to 10-month highs. US Corporate spreads were 3bp tighter at 94bp as investor sentiment improved amid fading of the “Reddit” short squeeze. More guidance increases on earnings than any time over the past 10 years have helped to boost sentiment further. There was moderate new issuance, led by a large deal from Apple, plus issuance from Alibaba and Altria.

    • The Bank of England held monetary policy steady and forecasts recovery from the second quarter. The UK's monetary policy remained unchanged. The prospect of an immediate implementation of negative interest rates faded after a report from commercial banks indicated that it would take them a minimum of six months to prepare their operations for such a shift. Bank of England Governor Andrew Bailey suggested that the economy would bounce back strongly, especially as the vaccine rollout was well under way, with over 10m adults inoculated in the UK. Ten-year gilt yields rose towards 0.45%, their highest level since March.

    • Eurozone inflation rebounded strongly in January. Consumer price inflation rose 0.9% on year in January; the first monthly rise in six months, and the highest rate of growth for almost a year. Rising food and industrial product prices were the key factors behind the higher-than-expected figure. Core inflation, which excludes energy and food, rose by 1.4%. However, the inflation rate remains well below the European Central Bank's 2.0% target. Separately, Eurozone GDP figures were released, showing that GDP fell 6.8% in 2020, as fourth-quarter GDP fell 0.7% sequentially.

    • Junk bond yields fall. The US effective yield on CCC-rated debt fell to 7.6%, its lowest level since mid-2014 (it reached an all-time low of 7.3% in 2014). Demand for high-yielding assets and greater risk tolerance among investors have been the key factors driving yields lower.

    Chart of the Week: US corporate yields hit one year low

    Source: Bloomberg. Data as at 5 February 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 94bp -3
    Bloomberg Barclays Euro Corporate Index 89bp -4
    Bloomberg Barclays Sterling Non Gilts Index 94bp -2
    Bloomberg Barclays US Corporate High Yield Index 339bp -23
    Bloomberg Barclays Pan-European High Yield Index 320bp -23
    Bond yields (10yr)
    USA 1.14 7
    Germany -0.45 6
    Japan 0.06 1
    UK 0.44 11
    EquitiesWeek-to-date change
    S&P 500 3,872 +4.2%
    DJ Euro Stoxx 50 3,642 +4.6%
    FTSE 100 6,504 +1.5%
    DAX 14,060 +4.7%
    Nikkei 225 28,342 +2.5%
    Currencies
    EUR/USD 1.20 -1.4%
    JPY/USD 105.54 -0.8%
    GBP/USD 1.37 -0.3%
    Commodities
    Brent Crude ($ per barrel) 58.8 +5.3%
    WTI Crude ($ per barrel) 56.2 +7.7%
    Gold ($ per ounce) 1,794 -2.9%

    Source: Bloomberg, 5 February 2021. Prices close of business 4 February 2021.

    Economic calendar

    08 February: Eurozone investor confidence, German industrial production
    09 February: UK retail sales, US business optimism, China trade balance
    10 February: US CPI, China CPI
    11 February: US initial jobless claims
    12 February: UK Q4 GDP, Eurozone industrial production, US Michigan consumer sentiment index

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