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    Weekly fixed income review: January

    Weekly fixed income review: January

    27 January 2023 Fixed income
    Week to 27 January 2023
    • US reports GDP growth for Q4 2022 of 2.9% annualized on a year ago. The advance report for US GDP showed a slightly faster expansion than markets had expected in the final quarter of 2022, although a slight deceleration compared to the previous quarter. The growth data followed the release of a modestly better S&P Global Composite PMI indicator for January for the US. Though still below 50, it increased to 46.6 from 45.0, with improvements in both manufacturing and services components.

    • Muni bonds largely unchanged. High grade tax-exempt munis were largely flat following a relatively robust start to the year. Munis did outperform Treasuries slightly through to 10 years while remaining unchanged on the long end. The five-year and 10-year muni to Treasury yield ratio spots are now only at 57% and 63%, respectively, while the long end muni ratio remains at 88%. Monthly and weekly reporting funds experienced inflows of $1.3bn, according to Lipper. ETFs reported $611m of outflows. The reception for this week’s $6bn calendar was mixed with some names garnering strong demand, but others needed to be repriced. Next week’s calendar appears fairly light as issuers wait for better direction from the Fed. Ten-year AAA rated tax-exempt munis are now yielding around 2.19%, while 10-year AAA rated taxable munis are yielding around 4.55%.

    • Bond market volatility remains largely absent during the week. As markets await central bank meetings in the US, Eurozone and UK next week, movements in government bond yields and credit spreads were generally modest over the week. Ten-year US Treasuries ended at 3.52%, while the equivalents in Germany and the UK at 2.23% and 3.32%, respectively. Only the move in Japan was notable, as 10-year yields increased to 0.49%. Credit spreads for investment grade and high yield indices declined slightly.

    • Eurozone economic data shows some improvement. Consumer sentiment in the eurozone improved, with the Consumer Confidence Index increasing to -20.9 in January from -22.2 in December, marking its best level for almost a year. The preliminary eurozone composite PMI for January rose above the 50.0 level (which separates contraction from expansion) to 50.2, ahead of market forecasts and up from December’s 49.3. It was the first reading above 50 for seven months, as the services sector improved, and manufacturing fell by less than expected. Meanwhile, the German government revised its 2023 economic forecast higher, from a fall of 0.4% to growth of 0.2%, as the negative impact from Europe’s energy crisis has been less severe than originally thought. Germany’s IFO Business Climate Index also rose to its highest level for seven months.

    • Hawkish comments continue to emerge from the European Central Bank (ECB). In a speech during the week, ECB President Christine Lagarde reinforced the central bank’s current tough monetary stance by saying that the ECB would “stay the course” in keeping interest rates in “restrictive territory” to bring inflation back towards the 2% target. This followed earlier comments from the president of the Dutch central bank and ECB policymaker Klaas Knot who suggested that the central bank was primed not only to raise rates by 50bp in both February and March but would need to continue raising rates beyond then.

    • Weakening UK economic outlook. The composite PMI for January was weak, falling to 47.8, below forecasts and down from 49.0. The sixth successive month of contraction (below 50.0) was also the weakest figure for two years. The services PMI component weakened, to 48.0 from 49.9, while the manufacturing indicator improved. Public sector net borrowing for December hit a new record high for the month of £27.4bn, worsened ed by the government’s energy support program. There was better news on inflation, with annual producer price inflation easing to 14.7% in December, the lowest for nine months, 0.8% lower over the month, better than market forecasts. Despite the weaker data, the Bank of England is expected to raise rates next week by a further 50bp.

    • Bank of Canada (BoC) raises interest rates but signals the end is in sight. Canada’s central bank increased its benchmark interest rate by 25bp to 4.5%, in line with expectations, following a 50bp rise in December. More importantly, the BoC stated that this month’s rate hike should be viewed as the end of its recent period of aggressive monetary tightening, which has seen rates rise by 425bp in 10 months. This more dovish stance is dependent on an expected stabilization in the economy and further easing of inflation.

    Bloomber table 27-01-23

    Source: Bloomberg, 27 January 2023. Prices close of business 26 January 2023.

    Economic calendar

    30 Jan: Eurozone economic sentiment and consumer confidence, Germany Q4 GDP.
    31 Jan: Eurozone Q4 GDP, Germany CPI, US house prices, Japan unemployment, retail sales and consumer confidence, China PMIs.
    01Feb: US Fed FOMC interest rate decision, US ISM Manufacturing PMI, Eurozone CPI and unemployment.
    02 Feb: UK BoE interest rate decision, Eurozone ECB rate decision.
    03 Feb: US non-farm payrolls, Japan Services PMI.

    Week to 20 January 2023
    • US bond yields fall as risk aversion grows. The 10-year Treasury yield fell from 3.5% towards 3.3%, its lowest levels since September, on the back of lower inflation and lower production. The producer price inflation figure for December showed the annual rate falling to 6.2% – below expectations and behind November’s figure of 7.3% – as energy and food costs eased. It was the lowest figure since March 2021. Later in the week, retail and industrial production data showed worse-than-expected month-on-month falls. The market expects the data to give the Federal Reserve added reasons to slow the pace of interest rate hikes; such a view was reflected in a further decline in the current forecast peak Fed funds rate (expected in June 2023) to approximately 4.8%.

    • The European Central Bank (ECB) united in hawkish approaches to rates. Minutes to the December ECB meeting indicate a determination by the bank to bring inflation under control, confounding the hopes of the doves in the market. Several policymakers voted for a 75bp rise, worried that inflation had become too entrenched in the economy, although a 50bp hike was ultimately implemented. ECB President Christine Lagarde stated that “inflation, by all accounts and whichever way you look at it, is way too high”. Markets are pricing in a further 70bp of hikes, with an estimated peak rate of 3.2% by August. Having fallen at the beginning of the week, eurozone bond yields crept higher after the release of the ECB’s minutes.

    • Contrary to speculation, the Bank of Japan (BoJ) keeps monetary policy unchanged. Given the rise in inflationary pressure in Japan and the BoJ’s recent widening of its yield bands for the 10-year government bond, there had been growing speculation that the central bank would signal an adjustment in its policy at its meeting this week. However, the BoJ made no change to its overall policy nor adjusted its yield curve control again. BoJ Governor Haruhiko Kuroda stated that he expected core inflation, which hit 4.0% in December – the highest rate for 41 years – would gradually fall back to below its 2% target in the second half of the fiscal year 2023. The yield on its benchmark 10-year bond, which had been trading at, or even slightly above, the upper end of the 0.5% band, fell back towards 0.4% on the press release from the central bank, while the yen weakened.

    • UK inflation eases. The annual rate of consumer inflation fell in December to 10.5% from 10.7% in November. The figure was in line with market expectations and mainly reflected a moderation in petrol prices. The cost of food and eating out at restaurants accelerated, however. Core inflation, which excluded energy and food costs, remained unchanged at 6.3% but a little higher than expected. Gilt yields fell on the news but recovered somewhat later in the week. Despite some surprisingly dovish comments from Bank of England Governor Andrew Bailey on the likely path of inflation and interest rates, the market still expects the central bank to hold the pace of its tightening for longer than the Fed and European Central Bank.

    • High grade muni bonds rally. High grade muni bonds rallied across the curve and outperformed Treasuries all along the maturity spectrum. The 5-year and 10-year muni to Treasury yield ratios are now even richer than last week at 60% and 65%, respectively, while the long end muni ratio fell from 91% to 88%. Per Lipper, monthly and weekly reporting funds experienced inflows of $1.5 billion, with the weekly reporters accounting for all the additions. ETF flows, while positive at $144 million, were more muted for the second week in a row compared to the open-end funds. This week’s substantial $9-10 billion calendar had no problem getting done as heavy investor demand was evident with the strong oversubscriptions. And the secondary market continued to see acute interest inside of 12 years on the curve. Looking at the forward calendar, new issue supply for next week falls to $5.5 - $6 billion with about $600 million in taxable muni debt. Ten-year AAA-rated tax-exempt munis are now yielding around 2.21%, and 10-year AAA-rated taxable munis are yielding around 4.45%.

    Bloomber table 20-01-23

    Source: Bloomberg, 20 January 2023. Prices close of business 19 January 2023.

    Economic calendar

    23 Jan: Eurozone consumer confidence.
    24 Jan: US, UK and eurozone PMI, UK public sector borrowing.
    25 Jan: UK PPI, Japan leading economic index, Germany business sentiment.
    26 Jan: US Q4 GDP, durable goods, trade balance and initial jobless claims.
    27 Jan: US consumer sentiment, eurozone money supply.

    Week to 13 January 2023
    • Bond markets price in lower interest rates. In the US, interest rate expectations for the next Federal Open Market Committee meeting (taking place at the end of January) fell, with the expectation of a 25bp rise gaining broader traction. Peak rates (anticipated in June) and end-2023 rates are predicted at just below 5% and 4.5%, respectively. The 10-year Treasury yield fell below 3.5%, close to recent December lows, as US inflation fell again. However, two Fed officials (Atlanta Fed Chairman Raphael Bostic and Richmond Fed Chairman Thomas Barkin) stated the fight against inflation was not yet over. Both said they fully expected interest rates to rise above 5% to ensure annual inflation falls back towards the Fed's 2% target. The comments came after better-than-expected non-farm payrolls at the end of last week and figures showing jobless claims at the lowest level for three months.

    • US inflation falls for the sixth month in a row. The latest US CPI print reflected price rises of 6.5% in December, in line with market expectations. Accordingly, the inflation print reflected the sixth successive monthly decline (from its peak of 9.1% in June), and the lowest figure for 14 months. Easing fuel and energy costs represented the primary factor behind the lower number. Core inflation, which excludes energy and food, rose 5.7%, the third successive decline in the series since a peak of 6.6% in September, and down from November’s 6% level.

    • Calls emerge for the European Central Bank (ECB) to continue tightening. President of the Finnish central bank and ECB policymaker Olli Rehn called on the ECB to continue raising rates “significantly” from current levels. He suggested present rates are too low to deal with inflation of over 9%, and they would need to be raised despite recessionary risks. Employment levels remain very tight, with unemployment at an all-time low of 6.5%, which could lead to higher wage demands. Despite this, eurozone bond yields declined mildly during the week as optimism grew that inflation rates may have peaked. Accordingly, the spread between German and Italian 10-year bond yields fell to 185bp, down approximately 20bp over the week, and down from over 210bp at the turn of the year.

    • US corporates hurry to raise money in markets. According to data from Dealogic, there was a surge in fundraising from US companies in the first week of 2023, amounting to almost $64bn, a jump of almost 75% compared with the final five weeks of 2022. The large amount of deals, primarily investment grade paper, reflects improved credit conditions for companies in the US and an effort to lock in lower rates ahead of any further tightening by the Fed.

    • The World Bank warns global recession in 2023 a real risk. The World Bank cut its forecasts for global economic growth and suggested the global economy faces a possible recession in 2023 owing to the perfect storm of rising interest rates, still-elevated inflation, falling demand and the ongoing distortion caused by the war in Ukraine. It cut its forecast for global growth from 3% (made in June 2022) to 1.7%, with several countries facing a possible recession.

    • High grade muni bonds rallied across the curve and outperformed Treasuries all along the maturity spectrum. The 5-year and 10-year muni to Treasury yield ratios now stand 62% and 67%, respectively, while the long-end muni ratio fell from 92% to 91%. While monthly reporting funds experienced outflows, weekly reporting funds experienced inflows across all categories, totaling $2 billion. Lack of supply and strong seasonal reinvestment increased demand for bonds. Investors have significant cash levels to deploy, especially inside of 12 years. ETFs concentrated on longer maturity paper. The elevated demand was evident in oversubscriptions for new issues, which repriced at higher levels. Ten-year AAA rated tax-exempt munis are now yielding around 2.33% and 10-year AAA rated taxable munis are yielding around 4.57%.

    Bloomber table 13-01-23

    Source: Bloomberg, 13 January 2023. Prices close of business 12 January 2023.

    Economic calendar

    16 Jan: Germany WPI, China house prices.
    17 Jan: UK unemployment, UK average earnings, China Q4 GDP, eurozone economic sentiment.
    18 Jan: UK CPI and RPI, eurozone CPI, US PPI and retail sales, BoJ monetary policy statement.
    19 Jan: ECB policy meeting minutes, US housing starts and initial jobless claims, Japan CPI.
    20 Jan: UK retail sales and consumer confidence, Germany PPI.

    Week to 06 January 2023
    • Markets seek inflation fall after large bond losses in 2022. Aggregate global bonds posted a negative return of more than -20% in 2022, the first (formal) bear market for 70 years, triggered by soaring inflation levels and the consequent aggressive tightening from global central banks. Over the year government bond yields hit more than decade-high levels in many major markets. However, there has been some recent respite for bond markets, with the rising hope that inflation may be peaking and that the pace of interest rate hikes may slacken in 2023.

    • Federal Reserve policy meeting minutes reveal hawkish mindset. The main message to markets from the release of the Fed’s minutes from last month’s policy meeting is that the central bank’s policymakers are reluctant to ease up on higher rates while inflation is persistently high. None of the policy group expected lowering interest rates this year, despite growing signs that inflation has peaked. The Fed seemed at pains to address any misunderstandings by the market about the future direction of rates, stating that it was “important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee's resolve to achieve its price stability goal.” Despite this, the market is still pricing a cut in interest rates later this year.

    • Eurozone inflation eases in December. Annual inflation in the eurozone continued to decline from its recent peak in October, falling to 9.2% in December, aided by easing energy cost increases. The lower-than-expected figure had been preceded by better individual December reports, notably in Germany and France, where inflation also fell by more than forecast. Additionally, the eurozone producer price index fell to 27.1% in November, also below expectations. The market continues to expect the European Central Bank (ECB) to tighten policy, and ECB policy member Martins Kazaks suggested the central bank would raise rates significantly in the near term. He said: “At the February and March meetings, we will have significant rate increases”.

    • UK food prices soar in December. The price of food in supermarkets rose 13.3% year on year in December, according to data from the British Retail Consortium (BRC), the most since records began back in 2005. The rise was mainly driven by fresh food prices which rose by 15%. The chief executive of the BRC pointed to the war in Ukraine and its impact on fertilizers and animal feed as a major factor. However, overall supermarket store prices eased slightly in December, though only to 14.4%, giving some hope that price increases may be peaking.

    • The IMF warns of a widespread global economic slowdown in 2023. IMF President Kristalina Georgieva stated that the global economy will likely experience a worse year in 2023 than in 2022 as the three key engines of growth – the US, Europe and China – slow simultaneously and about one third of nations fall into recession. 2023 will be “tougher than the year we leave behind”, she said. Her views reflect the likely impact of further monetary tightening, most notably in the US and Europe, on the global economy as well as more cases of COVID in China and the increased cost of living for many countries.

    • High grade muni bonds rally across the curve. Positive moves for munis lagged Treasuries except at the front end. The long end muni to Treasury yield ratio rose slightly from 91% to 92%. Following 2022’s historic trend of mutual fund outflows, Lipper once again reported net fund redemptions of $2.0bn for the seven-day period ending 4 January. All open-end mutual fund categories experienced $3.3bn of outflows while ETFs registered inflows of $1.3bn. The new issue calendar was light. The one notable deal, a $765m Triborough Bridge and Tunnel Payroll Tax issue (NR/AA+) was very well received and largely over-subscribed. Bid-wanted lists were muted at below $1bn per day while retail demand was intense especially in the five-year to 12-year part of the curve. The market is facing the prospect of light new issue supply for January and strong reinvestment demand. Calendar for next week is under $4bn. Ten-year AAA rated tax-exempt munis now yield around 2.58% and 10-year AAA rated taxable munis yield around 4.75%.

    Bloomber table 06-01-23

    Source: Bloomberg, 06 January 2023. Prices close of business 05 January 2023.

    Economic calendar

    09 Jan: Eurozone unemployment and investor confidence, German industrial production.
    10 Jan: UK retail sales.
    11 Jan: China CPI and PPI, Japan leading economic index.
    12 Jan: US CPI and initial jobless claims, ECB economic bulletin.
    13 Jan: UK GDP (Nov), industrial production and trade balance, US consumer sentiment, eurozone industrial production.

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