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    Weekly fixed income review: July

    Weekly fixed income review: July

    30 July 2021 Fixed income
    Week to 30 July 2021
    • The US Federal Reserve (Fed) moves closer to tapering. The Fed maintained monetary policy at its latest meeting, keeping the fed funds rate in a 0-0.25% target range and its monthly asset purchases at $120 billion. The Fed signaled that it has moved closer to a decision on when it might start tapering but did not provide any further details. Fed chairman Jerome Powell said that the economy had made “progress” towards the central bank’s twin goals of 2% average inflation and full employment, but the Delta variant of COVID-19 is a cause of uncertainty. There is “upside risk” to inflation but price pressures are likely to prove transitory while the Fed wants to see better job numbers coming through. The US economy grew by an annualized 6.5% over the second quarter of the year; this was less than the consensus expectation of 8.5%, but slightly up from the previous quarter's growth of 6.4%. US real yields fell over the week. With the outlook for the US economy becoming less certain as the Delta variant of COVID-19 spreads, the market is now expecting interest rates to stay lower for longer; meanwhile, market expectations of higher inflation remain elevated.

    • The European Central Bank (ECB) signals dovish policy. The ECB's move to make its monetary policy even more dovish continued to support bonds in eurozone countries. The yields on 10-year German bunds, French OATs and Italian BTPs fell by 3 bps, 5 bps and 6bps to -0.45%, -0.09% and 0.62% respectively, over the week.

    • Japan to extend state of emergency. The Japanese government is expected announce another state of emergency in Tokyo due to COVID-19. The IMF has reduced its 2021 GDP growth forecast for Japan from 3.3% to 2.8%. However, the yield on 10-year Japanese government bonds was static at 0.02% over the week.

    Chart of the Week: the precipitous decline of US real yields (10-year Treasury yield minus CPI)

    Chart of the Week: the precipitous decline of US real yields (10-year Treasury yield minus CPI)

    Source: Bloomberg. Data as at 30 July 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 85bp -1
    Bloomberg Barclays Euro Corporate Index 84bp 0
    Bloomberg Barclays Sterling Non Gilts Index 90bp -1
    Bloomberg Barclays US Corporate High Yield Index 298bp +9
    Bloomberg Barclays Pan-European High Yield Index 299bp 0
    Bond yields (10yr)
    USA 1.27% -1
    Germany -0.45% -3
    Japan 0.02% +0
    1UK 0.57% -1
    EquitiesWeek-to-date change
    S&P 500 4,419 0.2%
    DJ Euro Stoxx 50 4,117 0.2%
    FTSE 100 7,078 0.7%
    DAX

    15,640

    -0.2%
    Nikkei 225 27,782 0.9%
    Currencies
    EUR/USD 1.19 1.0%
    JPY/USD 109.48 1.0%
    GBP/USD 1.40 1.5%
    Commodities
    Brent Crude ($ per barrel) 76.05 +2.6%
    WTI Crude ($ per barrel) 73.62 +2.2%
    Gold ($ per ounce) 1,828.17 +1.4%

    Source: Bloomberg, 30 July 2021. Prices close of business 29 July 2021.

    Economic calendar

    2 August: China Caixin manufacturing PMI; US ISM manufacturing PMI; Japan CPI
    3 August: US factory orders; RBA interest rate decision
    4 August: US ADP employment; US ISM services PMI; eurozone retail sales
    5 August: BoE interest rate decision; US initial jobless claims; US balance of trade
    6 August: US non-farm payrolls

    Week to 23 July 2021
    • Fears over the spread of COVID-19 variants saw bond markets rally. The rise in cases of Beta and Delta variants across many developed and emerging markets saw a ‘risk-off’ shift towards safer-haven investments, while equity markets tumbled. Recent worries over rising inflation rates have, at least temporarily, been superseded by fears over economic growth. Vaccination rates in many countries are not yet high enough to provide comfort that variant strains might not be potentially harmful. Added to that are fears these strains are more resilient to current vaccines. The 10-year US Treasury yield fell below 1.2%, its lowest level since February, while yields also dropped in the UK and eurozone government bond markets, before recovering towards the end of the week.
    • Bank of England (BoE) policy committee member warns over adjusting policy too soon. In contrast to some recent calls from senior BoE executives arguing for a tightening of monetary policy, rate-setter Jonathan Haskel said that the central bank should be careful not to tighten too soon. “The economy is not fully recovered yet and faces two headwinds over the coming months: the highly transmissible Delta variant and a tightening of the fiscal stance”, he stated. There has also been evidence that the high number of self-isolating employees is negatively impacting growth. Recent media attention has been focused on the debilitating impact for companies of workers being forced into self-isolation by the UK’s test-and-trace app. All these factors have led to a reassessment of the UK’s economic growth outlook, with more headwinds appearing. The 10-year gilt yield dropped to a five-month low of just above 0.50% during the week.
    • UK debt servicing costs hit a record high. The interest rate cost on UK public debt hit a new monthly high of £8.7bn in June. UK debt levels have spiralled during the pandemic and even though interest rates are at ultra-low levels, the increasing debt burden has been mirrored by higher servicing costs. The cost of debt in the first three months of 2021, which amounted to £17.9bn, was 60% above the same period in 2020. The Treasury borrowed an additional £22.8bn in June, further increasing the debt pile. With concerns that rising inflation will push interest rates higher, speculation has grown that the Treasury will look to tighten its fiscal policy as soon as feasibly possible.  
    • The European Central Bank (ECB) unveiled its new strategy. Following much speculation, the ECB announced its new stance on monetary policy during the week. In order to boost growth in the eurozone and achieve its 2% inflation target, the central bank will keep interest rates at ultra-low levels for longer and will also consider lowering them further into negative territory if inflation remains subdued and consistently below the 2% target. The anticipation of the ECB’s policy statement, as well as the rise in variant strains of COVID-19, led to a collective fall in major eurozone bond yields to their lowest levels in almost six months. A widely used measure of inflation expectations (the euro five-year, five-year inflation swap rate) continued to ease and is currently trading at just above 2%, having been near 2.4% in May.

    Chart of the Week: the 10-year Treasury yield fell to its lowest level since February (%)

    Chart of the Week: the 10-year Treasury yield fell to its lowest level since February (%)

    Source: Bloomberg. Data as at 23 July 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 87bp +1
    Bloomberg Barclays Euro Corporate Index 84bp +1
    Bloomberg Barclays Sterling Non Gilts Index 91bp +2
    Bloomberg Barclays US Corporate High Yield Index 292bp +10
    Bloomberg Barclays Pan-European High Yield Index 299bp +8
    Bond yields (10yr)
    USA 1.28% -1
    Germany -0.43% -7
    Japan 0.02% -1
    1UK 0.57% -6
    EquitiesWeek-to-date change
    S&P 500 4,367 0.9%
    DJ Euro Stoxx 50 4,059 0.6%
    FTSE 100 6,968 -0.6%
    DAX

    15,515

    -0.2%
    Nikkei 225 27,548 -1.6%
    Currencies
    EUR/USD 1.18 -0.3%
    JPY/USD 110.14 -0.1%
    GBP/USD 1.38 0.0%
    Commodities
    Brent Crude ($ per barrel) 73.79 +0.3%
    WTI Crude ($ per barrel) 71.91 +0.1%
    Gold ($ per ounce) 1,806.92 -0.3%

    Source: Bloomberg, 23 July 2021. Prices close of business 22 July 2021.

    Economic calendar

    26 July: US new home sales, German IFO business climate index
    27 July: US durable goods orders, US consumer confidence index
    28 July: Japan leading economic index, US FOMC statement
    29 July: UK house prices, UK consumer credit, US initial jobless claims, US Q2 GDP
    30 July: Eurozone Q2 GDP, CPI and unemployment, US Michigan consumer sentiment index

    Week to 16 July 2021
    • US inflation fears were stoked by the release of June’s figure. Consumer price inflation hit 5.4% on an annual basis in June, above May’s 5.0% rate and higher than market expectations. It was the steepest rise for almost 13 years. Fuel and second-hand car prices saw the largest jumps, of over 45%. Annual core inflation, excluding food and energy prices, was also higher than had been anticipated, rising 4.5% in June, the largest increase for close to 30 years. However, the US Federal Reserve maintained its line that the current spike in inflation largely reflected temporary effects and that there was currently no reason to alter policy. In his testimony to Congress, the central bank’s chairman, Jerome Powell, pointed to still fragile employment data, and said that while the labour market is recovering, a policy response is “a ways off”. Treasury yields jumped on the inflation release but fell back on the comments from Powell. Corporate spreads widened slightly. There was about $20 billion in US corporate bond issuance, led by US banks such as Goldman Sachs and Bank of America.
    • The European Central Bank (ECB) sent out a note of caution on the outlook for the eurozone. ECB president Christine Lagarde sounded a cautious tone this week in light of the surge in cases of the Delta COVID-19 variant and its potential dampening effect on economic recovery. She hinted that the central bank’s current loose monetary policy would be extended well into the future, emphasising the need to be flexible and not give the impression that “the exit” (from current policy) “is in the next few weeks, months”. Eurozone bond yields fell over the week.
    • Australia, Canada and New Zealand cut bond purchases. The Reserve Bank of New Zealand announced that it would terminate its bond-purchasing scheme within weeks. This followed the news last week that the Reserve Bank of Australia would reduce the size of its bond-buying programme. While the New Zealand monetary authorities did not alter the benchmark interest rate, speculation has grown that it will soon do so. The Bank of Canada also tapered its bond-purchasing programme, reducing its weekly budget from C$3bn to C$2bn. 

    Chart of the Week: US CPI inflation continues its rise

    Chart of the Week: US CPI inflation continues its rise

    Source: Bloomberg. Data as at 16 July 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 85bp 0
    Bloomberg Barclays Euro Corporate Index 83bp 0
    Bloomberg Barclays Sterling Non Gilts Index 89bp -1
    Bloomberg Barclays US Corporate High Yield Index 282bp +13
    Bloomberg Barclays Pan-European High Yield Index 290bp +1
    Bond yields (10yr)
    USA 1.30% -6
    Germany -0.33% -4
    Japan 0.01% -2
    1UK 0.66% +1
    EquitiesWeek-to-date change
    S&P 500 4,360 -0.2%
    DJ Euro Stoxx 50 4,056 -0.3%
    FTSE 100 7,012 -1.5%
    DAX

    15,630

    -0.4%
    Nikkei 225 28,279 1.2%
    Currencies
    EUR/USD 1.18 -0.5%
    JPY/USD 109.83 0.3%
    GBP/USD 1.38 -0.5%
    Commodities
    Brent Crude ($ per barrel) 73.47 -2.8%
    WTI Crude ($ per barrel) 71.65 -3.9%
    Gold ($ per ounce) 1,829.47 +1.2%

    Source: Bloomberg, 16 July 2021. Prices close of business 15 July 2021.

    Economic calendar

    19 July: Japan CPI
    20 July: US housing starts, German PPI
    21 July: UK public sector net borrowing
    22 July: US initial jobless claims, eurozone consumer confidence, UK consumer confidence
    23 July: UK retail sales, US, UK and eurozone (preliminary) PMIs

    Week to 9 July 2021
    • US Treasury yields dropped to five-month lows. The 10-year Treasury yield fell to 1.3% during the week – a level not seen since February. The release of the minutes of the US Federal Reserve’s June policy meeting indicated that tapering of the central bank’s bond-purchasing scheme was discussed, but that there was still some disagreement among officials as to when such action should be implemented. However, the minutes acknowledged that inflation risks had risen, and that tapering was being actively considered.

    • The Office for Budget Responsibility (OBR) followed the IMF and warned the UK over its debt. Echoing IMF's recent concerns, the OBR published a report looking at the sustainability of the UK’s finances. The report highlighted the risk that COVID-19-related costs are greater than expected, as well as the threat to the cost of debt from rising inflation and subsequent interest rate hikes. In addition, the OBR suggested that the government’s climate change initiatives could lead to additional debt amounting to some £470bn over 30 years. While current debt-servicing costs are less than 1% of GDP, due to ultra-low interest rates, an inflation rate of 4% could see these costs rise to 4% of GDP by 2050, according to the report, which would be the highest level since just after World War Two. Meanwhile, the 10-year gilt yield dropped to its lowest level in five months, falling below 0.6%, despite Prime Minister Boris Johnson’s confirmation that COVID-19 restrictions would be largely lifted on 19 July.

    • The EU raised its forecast for eurozone GDP. The EU increased its outlook for growth in the eurozone economy from 4.3% to 4.8% for this year, and from 4.4% to 4.5% for 2022. The revision reflected the better-than-expected recovery in business and social activity in Europe during the second quarter. Regarding inflation, the EU expects it to increase by 1.9% year on year in 2021, before slowing to 1.4% in 2022. Other economic data released during the week pointed to recovery, not least the final composite purchasing managers’ index figure for June, which rose to 59.5, ahead of the preliminary figure of 59.2, and above May’s 57.1. Meanwhile, the European Central Bank altered its inflation target from “close to but below 2%” to 2%. Bond yields across the eurozone dropped over the week, in keeping with the global trend.

    • The Australian central bank started to taper asset purchases. While keeping interest rates unchanged, the Reserve Bank of Australia reduced its weekly bond-purchasing budget from A$5bn to A$4bn. The central bank did, however, extend its bond-buying programme to mid-November and reaffirmed that it was unlikely that it would raise rates before 2024.

    Chart of the Week: US Treasury curve continues to flatten 

    Chart of the Week: US Treasury curve continues to flatten

    Source: Bloomberg. Data as at 9 July 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 85bp 0
    Bloomberg Barclays Euro Corporate Index 84bp -1
    Bloomberg Barclays Sterling Non Gilts Index 91bp -1
    Bloomberg Barclays US Corporate High Yield Index 291bp -6
    Bloomberg Barclays Pan-European High Yield Index 282bp -4
    Bond yields (10yr)
    USA 1.43% -12
    Germany -0.26% -4
    Japan 0.06% -3
    1UK 0.75% -4
    EquitiesWeek-to-date change
    S&P 500 4,239 0.2%
    DJ Euro Stoxx 50 4,096 0.2%
    FTSE 100 7,088 0.3%
    DAX

    15,571

    -0.8%
    Nikkei 225 28,959 0.1%
    Currencies
    EUR/USD 1.22 0.0%
    JPY/USD 109.33 0.2%
    GBP/USD 1.42 0.1%
    Commodities
    Brent Crude ($ per barrel) 72.52 0.9%
    WTI Crude ($ per barrel) 70.29 1.0%
    Gold ($ per ounce) 1,898.51 0.4%

    Source: Bloomberg, 9 July 2021. Prices close of business 8 July 2021.

    Economic calendar

    12 July: Japan PPI, Machinery orders
    13 July: German/French CPI, US CPI
    14 July: UK CPI/PPI, eurozone industrial production, US PPI
    15 July: Chinese GDP, UK employment, Italian CPI, US industrial production
    16 July: Eurozone CPI, US retail sales

     

    Week to 2 July 2021
    • In the US, economic data continued to support the notion of recovery. House prices surged 14.6% year-on-year in April, the highest growth rate since records began in 1987, according to the S&P CoreLogic Case-Shiller National Home Price Index. US consumer confidence rallied in June to its highest level since February 2020, as measured by the Conference Board’s Consumer Confidence Index, reflecting greater confidence regarding job security and the economy’s prospects. Meanwhile, there were further calls for a gradual tapering of the Federal Reserve’s ultra-loose monetary policy. Federal Reserve Bank of Dallas President Robert Kaplan suggested central bank support should begin reducing before the end of the year as while inflation will likely be lower in 2022, it will be more widespread across the economy, in his view. The 10-year Treasury yield fell over the week as fears over inflation subsided, despite the stronger economic data.

    • Bundesbank chief calls for a reduction in the European Central Bank (ECB) bond-purchasing scheme. President of the Bundesbank Jens Weidmann said that inflation risks have grown significantly and the ECB needs to properly consider a gradual reduction in its monthly bond purchases. He highlighted rising energy prices, viewing them as a long-term upward adjustment brought about by policies aimed at tackling climate change, and called for the ECB to wind down the scheme once recovery to pre-pandemic economic growth is complete, likely in 2022. Meanwhile, the eurozone’s preliminary annual consumer price inflation figure for June fell from May’s two-and-a-half year high of 2.0% to 1.9%, owing to a moderation in energy price inflation. Meanwhile, the eurozone Economic Sentiment Indicator rallied to a 21-year high. Major eurozone government bond yields fell over the week.

    • The Bank for International Settlements (BIS) warned the UK government over the cost of debt. With inflation picking up and expectations that central banks around the globe will have to gradually adjust policy, the BIS, in its annual economic report, warned the UK over potentially rising debt costs. As the UK’s debt levels have escalated during the pandemic, rising to over £2trn and 100% of GDP, any increase in interest rates to combat rising inflation would put a huge strain on the government’s purse. In other news, the Bank of England’s chief economist Andy Haldane warned that UK inflation could top 4% by the end of the year.

    • The Bank of Japan pulled back on quantitative easing. The central bank announced a cutback to its bond-purchasing programme for the coming quarter from a monthly budget of ¥5.9trn to ¥5.65trn, and fixed the budget for the whole quarter rather than using its previous monthly timeframe, with an eye on lessening the impacts of its budget announcements and purchasing activity in the market. An auction of 10-year Japanese government bonds was met with firm demand. In other news, the quarterly Tankan survey of business managers showed a rising trend in their economic outlook. The 10-year government bond yield fell over the week.

    Chart of the Week: US 10-year Treasury yields fell

    Chart of the Week: US 10-year Treasury yields fell

    Source: Bloomberg. Data as at 2 July 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 81bp 0
    Bloomberg Barclays Euro Corporate Index 83bp 0
    Bloomberg Barclays Sterling Non Gilts Index 90bp 0
    Bloomberg Barclays US Corporate High Yield Index 265bp -10
    Bloomberg Barclays Pan-European High Yield Index 284bp -17
    Bond yields (10yr)
    USA 1.46% -7
    Germany -0.20% -5
    Japan 0.04% -1
    1UK 0.73% -5
    EquitiesWeek-to-date change
    S&P 500 4,320 0.9%
    DJ Euro Stoxx 50 4,079 -1.0%
    FTSE 100 7,125 -0.2%
    DAX

    15,604

    0.0%
    Nikkei 225 28,707 -1.2%
    Currencies
    EUR/USD 1.18 -0.7%
    JPY/USD 111.57 -0.7%
    GBP/USD 1.38 -0.8%
    Commodities
    Brent Crude ($ per barrel) 75.84 -0.4%
    WTI Crude ($ per barrel) 73.23 +1.6%
    Gold ($ per ounce) 1,771.91 -0.5%

    Source: Bloomberg, 2 July 2021. Prices close of business 1 July 2021.

    Economic calendar

    05 July: China Caixin services PMI, eurozone composite PMI, eurozone investor confidence
    06 July: US composite PMI, eurozone retail sales
    07 July: UK Halifax house price index, Japan leading economic indicators
    08 July: US initial jobless claims, US consumer credit, German trade balance
    09 July: China CPI, UK industrial production, UK trade balance

     

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