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    Weekly fixed income review: January

    Weekly fixed income review: January

    15 January 2021 Fixed income
    Week to 15 January 2021
    • Increased expectations of rising inflation drove US Treasury yields higher. The 10-year Treasury bond yield rose close to 1.2% during the week – the highest level since March – as long-term inflation expectations continued to grow. Consumer prices rose by 1.4% over the year in December, boosted by higher gasoline pricing. Several US Federal Reserve officials, including Vice Chair Richard Clarida, drew attention to the pent-up demand and spending potential of the private sector, once more people are fully vaccinated against coronavirus. Further, Joe Biden announced a new stimulus package, amounting to $1.9trn, as the US battles through the current COVID-19 crisis, in which new cases and death levels are still rising ominously. A $38bn issue of 10-year Treasuries was met with strong demand, leading to a fall in yields from mid-week.
    • In the UK, Bank of England Governor Andrew Bailey appeared more cautious on the introduction of negative interest rates despite the weaker short-term economic outlook. This followed a statement earlier in the week from a fellow central bank policymaker suggesting there was a clear requirement for negative interest rates. Bailey suggested that negative interest rates could have the unintended consequence of further pressuring bank margins. Both parties, however, seemed to agree that the short-term outlook for the UK economy is challenging, with Bailey describing the economy as facing a “very difficult period”, as the mutant strain of COVID-19 spreads before vaccinations have been widely rolled out. This sentiment was reiterated by Chancellor Rishi Sunak who stated that the economy was likely to “get worse before it gets better”. GDP fell 2.6% over the month in November, bringing to a halt six consecutive months of growth. After rising early in the week, UK gilt yields drifted lower but remained modestly higher week on week.
    • Moody’s warned on growing eurozone debt levels. The credit rating agency downgraded its rating on eurozone debt to negative. It stated that the highest risks were in Italy, Spain, Portugal and Cyprus – all of which have recently seen all-time low benchmark government bond yields – as the economic devastation resulting from COVID-19 has caused government debt levels to soar, especially in southern European countries. Despite this, Spain successfully issued €10bn of 10-year bonds during the week, at an average yield of approximately 0.5%, which attracted demand of more than €130bn – the largest ever-recorded order book for a eurozone government debt issue.
    • There was a surge in eurozone corporate debt issuance. Credit markets in the eurozone have been inundated with several new issues from companies increasingly eager to lock in the low level of rates currently available. Utility company Eon launched a new €600bn issue at a coupon of just 0.1%, while budget-airline Wizz Air launched its maiden issue of €500bn at just over 1%. The low available funding costs are a boon to companies while the demand for the new paper reflects investor confidence that the European Central Bank will continue to support the market through its bond-buying programme.

    Chart of the Week: US Treasury 10-year yield (%) hits highest level since March

    Source: Bloomberg. Data as at 15 January 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 93bp -2
    Bloomberg Barclays Euro Corporate Index 90bp +3
    Bloomberg Barclays Sterling Non Gilts Index 96bp +2
    Bloomberg Barclays US Corporate High Yield Index 347bp -1
    Bloomberg Barclays Pan-European High Yield Index 341bp +11
    Bond yields (10yr)
    USA 1.13% +1
    Germany -0.55% -3
    Japan 0.04% +1
    UK 0.29% +0
    EquitiesWeek-to-date change
    S&P 500 3,796 -0.8%
    DJ Euro Stoxx 50 3,641 -0.1%
    FTSE 100 6,802 -1.0%
    DAX 13,989 -0.4%
    Nikkei 225 28,698 2.0%
    Currencies
    EUR/USD 1.22 -0.5%
    JPY/USD 103.80 0.1%
    GBP/USD 1.37 0.9%
    Commodities
    Brent Crude ($ per barrel) 56.42 +0.8%
    WTI Crude ($ per barrel) 53.57 +2.5%
    Gold ($ per ounce) 1,846.53 -0.1%

    Source: Bloomberg, 15 January 2021. Prices close of business 14 January 2021.

    Economic calendar

    18 January: China Q4 GDP, Japan industrial production
    19 January: Eurozone current account, eurozone economic sentiment survey
    20 January: UK CPI, eurozone CPI, Japan trade balance
    22 January: US initial jobless claims, US housing starts, Japan CPI
    23 January: UK consumer confidence index, UK retail sales, US, eurozone and UK PMI

    Week to 8 January 2021
    • US government bond yields rose as results from Georgia showed the Democrats set to take control of the Senate. The 10-year Treasury yield rose to over 1.0%, its highest level since March, as it became apparent that president-elect Biden will be able to implement more of his policy agenda with an effective majority in both the Senate and the House of Representatives. This is likely to include raising public spending and tax hikes and is expected to drive inflation higher.
    • US firms raised record amounts of funding in the first few days of the year. Over $50bn of new debt has been issued in the first week of 2021 according to Refinitiv, a record amount at this stage in a new year. The issuance was led by Mexico, Home Depot, Kroger, MetLife, and General Motors; all took advantage of low interest rates and strong investor demand. Corporate spreads widened in part due to the new issue market opening and partly due to net selling from Asia. Markets were largely agnostic about the disruption at the Capitol, though the Democrat sweep in Georgia boosted high-beta names on fiscal stimulus hopes.
    • The UK increased support measures for its economy. UK Chancellor Rishi Sunak pledged a further £4.6bn of support for businesses directly affected by the national lockdown. A report from several economists suggested that government borrowing could now hit £450bn this financial year and the budget deficit could be 20% of GDP. This is much higher than the £394bn estimate recently made by the Office for Budget Responsibility and reflects the impact of the latest series of lockdowns on the UK economy. UK gilt yields rose over the week.
    • The Irish government issued debt at a negative yield. It sold €5.5bn of 10-year bonds at an average yield of -0.257%. Demand exceeded €40bn. Italy also launched a new 15-year bond issue of €10bn and attracted record demand, with the issue over 10-times covered.
    • The World Bank warned of the likelihood of worldwide debt distress in 2021. The president of the World Bank, David Malpass, warned of the dire situation facing many frontier and developing nations, caused by the COVID-19 crisis and the consequent indebtedness. He described the situation as flashing “red alert”. He encouraged creditors to consider ways “to adjust the debt burden” borne by poorer nations, singling out Chad, Zambia and Ecuador as in need of debt relief.

    Chart of the Week: US Treasury 10-year yield rises sharply, UK gilts subdued

    Chart of the Week: US Treasury 10-year yield rises sharply, UK gilts subdued

    Source: Bloomberg. Data as at 8 January 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 96bp 0
    Bloomberg Barclays Euro Corporate Index 88bp -4
    Bloomberg Barclays Sterling Non Gilts Index 94bp -3
    Bloomberg Barclays US Corporate High Yield Index 350bp -10
    Bloomberg Barclays Pan-European High Yield Index 333bp -14
    Bond yields (10yr)
    USA 1.08% +17
    Germany -0.52% +5
    Japan 0.04% +2
    UK 0.28% +9
    EquitiesWeek-to-date change
    S&P 500 3,804 1.3%
    DJ Euro Stoxx 50 3,622 2.0%
    FTSE 100 6,857 6.1%
    DAX 13,968 1.8%
    Nikkei 225 27,490 0.2%
    Currencies
    EUR/USD 1.23 0.5%
    JPY/USD 103.81 -0.6%
    GBP/USD 1.36 -0.8%
    Commodities
    Brent Crude ($ per barrel) 54.38 +5.0%
    WTI Crude ($ per barrel) 50.83 +4.8%
    Gold ($ per ounce) 1,913.95 +0.8%

    Source: Bloomberg, 8 January 2021. Prices close of business 7 January 2021.

    Economic calendar

    11 January: China CPI, Japan trade balance
    12 January: UK retail sales
    13 January: Eurozone industrial production, US CPI
    14 January: US retail sales, US initial jobless claims
    15 January: UK GDP, UK industrial production, US Michigan consumer sentiment index, China GDP

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