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    Weekly fixed income review: November

    Weekly fixed income review: November

    26 November 2021 Fixed income
    Week to 26 November 2021
    • US President Joe Biden reappointed Jerome Powell as chairman of the US Federal Reserve (Fed). Although the Democratic-led government had considered alternative candidates to Powell, in particular Fed board member Lael Brainard – who is reputedly more dovish than Powell – the president decided to maintain continuity. Biden said the Fed’s immediate priorities were fighting inflation and using its powers to promote sustainable environmental policies. Bond yields increased on the news as investors expect Powell to continue to tighten monetary policy. The 10-year Treasury bond yield rose towards 1.7%, before falling back at the end of the week over fears of a newly detected variant of COVID-19. Initial jobless claims fell to a 52-year low.

    • A Bank of England policymaker warned on wage inflation. Jonathan Haskel, a member of the bank’s Monetary Policy Committee, urged vigilance on UK wage inflation: “the latest data continues to indicate a tight labour market, putting upward pressure on wages”. Recent unemployment and job vacancy figures point to an increasingly tight labour market.

    • A new long-dated, index-linked gilt attracted huge demand at a record low yield. The UK government sold an inflation-linked bond totalling £1.1bn, maturing in 2073 and with a coupon rate of 0.125%, at a record low average yield (for a syndicated bond) of -2.39%. The issue attracted nearly £18bn in demand. Yields on such inflation linked bonds have lowered in recent weeks as investors are prepared to pay for bonds that can protect them against even higher inflation.

    • The German Bundesbank expects annual consumer inflation to rise from 4.5% to 6.0%. Persistent supply-chain disruption and the escalation in wholesale energy prices have caused the central bank to increase its inflation outlook. Bond investors seemed initially wary of the inflation outlook; the 10-year Bund yield experienced its largest daily jump of the year, of over 8bp, before falling back at the end of the week. Business sentiment in Germany continued to deteriorate, with the IFO Business Climate indicator declining for the fifth consecutive month. Rising cases of COVID-19 and the reimplementation of tighter restrictions added to the gloom.

    • New Zealand raised interest rates. The Reserve Bank of New Zealand raised rates for the second month in a row, by 0.25bp to 0.75bp, and intimated that rates may have to rise further. Annual inflation is close to 5%, and the labour and housing markets both strong

    Chart of the Week: Falling US, UK and German unemployment rates (%) help push up inflation expectations

    Falling US, UK and German unemployment rates (%) help push up inflation expectations

    Source: Bloomberg. Data as at 26 November 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 94bp +2
    Bloomberg Euro Corporate Index 102bp +4
    Bloomberg Sterling Non Gilts Index 94bp +2
    Bloomberg US Corporate High Yield Index 311bp +10
    Bloomberg Pan-European High Yield Index 325bp +8
    Bond yields (10yr)
    USA 1.63% +9
    Germany -0.25% +9
    Japan 0.09% +1
    UK 0.97% +9
    EquitiesWeek-to-date change
    S&P 500 4,701 0.1%
    DJ Euro Stoxx 50 4,293 -1.5%
    FTSE 100 7,310 1.2%
    DAX 15,918 -1.5%
    Nikkei 225 29,499 -0.8%
    EUR/USD 1.12 -0.7%
    JPY/USD 115.36 -1.2%
    GBP/USD 1.33 -1.0%
    Brent Crude ($ per barrel) 82.22 +4.2%
    WTI Crude ($ per barrel) 78.39 +3.0%
    Gold ($ per ounce) 1,788.85 -3.1%

    Source: Bloomberg, 26 November, 2021. Prices close of business 25 November, 2021.

    Economic calendar

    29 November: UK consumer credit, eurozone economic sentiment, German CPI
    30 November: Eurozone CPI, US consumer confidence.
    01 December: UK house price survey, US ISM manufacturing PMI, German retail sales
    02 December: US initial jobless claims, eurozone PPI, eurozone unemployment
    03 December: US non-farm payrolls, US unemployment, US factory orders, eurozone retail sales

    Week to 19 November 2021
    • US inflation expectations continued to rise. Ten-year breakeven inflation rates hit the highest level for 16 years during the week, close to 2.8%, while five-year breakevens hit a record 3.2%. Rising inflation expectations were partly fuelled by the release of retail sales for October which climbed by 1.7% month on month, higher than had been expected, and the largest increase for seven months. Spending at petrol stations and electronic goods stores led the various retail categories in terms of spending growth. Meanwhile, ratings agency Moody’s downplayed the expected impact of recent US fiscal packages on inflation, citing the elongated nature of the spending, which amounts to only incremental amounts year after year, and the potential resulting productivity gains. A recent Reuters poll, however, showed that economists now expect a rate hike late next year, as opposed to the previous forecast of early 2023.

    • The UK’s inflation rate jumped again. The annual consumer price index rose to 4.2% in October, above market estimates and the highest rate since December 2011. Energy and fuel costs were the main drivers. Core inflation for the month was also higher than expected, rising by 3.4% year on year. With Bank of England Governor Andrew Bailey describing himself as “very uneasy” about the pickup in inflation, bond yields drifted higher, with the 10-year gilt yield touching 1%. Sterling also rose. Whether this further jump in inflation leads to a rate hike remains to be seen but the pressure keeps mounting on the central bank to act, although Bailey reiterated that wage inflation remains a critical indicator. Wage data from the Office of National Statistics showed that wages, including bonuses, rose 5.8% on an annual basis, in the three months to September, the lowest increase for five months. However, the market still clearly expects a rate hike before the end of the year.

    • UK employment data continued to impress. Unemployment dropped again, falling to 4.3% in the rolling three months to September, down from 4.5% in the three months to August. This marked the lowest level since July 2020. Total payrolls climbed 160,000 to a new record of 29.3m, while job vacancies rose again to 1.17m in the three months to October, also a new record level, with nearly 400,000 more vacancies than before the pandemic struck early last year. With the ending of the government’s furlough scheme occurring in September, these figures were encouraging.

    • The European Central Bank (ECB) reconfirmed its monetary policy stance. In a speech during the week, ECB President Christine Lagarde stated that, while inflation pressures were clearly building – with eurozone inflation confirmed as being at a 13-year high of 4.2% in October – and were likely to remain long-lasting, the economic recovery from COVID-19 remained fragile. The recent tightening of virus-related restrictions in countries such as the Netherlands has demonstrated that the pandemic is still likely to have a dampening effect on economic recovery. Additionally, the ECB expects current inflationary pressures to ease from mid-2022. Bond yields in most major eurozone government bond markets fell, and the euro currency index dropped to its lowest level since early 2020.

    Chart of the Week: Five-year US breakevens reached all-time highs (%)

    Five-year US breakevens reached all-time highs (%)

    Source: Bloomberg. Data as at 19 November 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 91bp +3
    Bloomberg Euro Corporate Index 98bp +7
    Bloomberg Sterling Non Gilts Index 92bp 0
    Bloomberg US Corporate High Yield Index 298bp +14
    Bloomberg Pan-European High Yield Index 314bp +2
    Bond yields (10yr)
    USA 1.59% +2
    Germany -0.28% -2
    Japan 0.08% +0
    UK 0.93% +1
    EquitiesWeek-to-date change
    S&P 500 4,705 0.5%
    DJ Euro Stoxx 50 4,384 0.3%
    FTSE 100 7,256 -1.3%
    DAX 16,222 0.8%
    Nikkei 225 29,599 0.0%
    EUR/USD 1.14 -0.6%
    JPY/USD 114.26 -0.3%
    GBP/USD 1.35 0.6%
    Brent Crude ($ per barrel) 81.24 -1.1%
    WTI Crude ($ per barrel) 79.01 -2.2%
    Gold ($ per ounce) 1,858.94 -0.3%

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

    Economic calendar

    22 November: Eurozone consumer confidence
    23 November: US, UK and eurozone composite PMIs
    24 November: US durable goods orders, US initial jobless claims, US consumer sentiment
    25 November: Japan CPI, Japan leading indicators, German consumer confidence
    26 November: Eurozone private loan growth

    Week to 12 November 2021
    • US inflation surged in October. The US inflation rate rose more than market forecasts, rising by 6.2% year on year and 0.9% month on month in October. The headline figure was the highest for 31 years as energy costs rose 30% on an annual basis, with gasoline prices up almost 50%. Earlier in the week, the producer price inflation figure for October had matched September’s annual rate of 8.6% but was marginally weaker than consensus estimates. The US Federal Reserve (Fed) Vice Chairman Richard Clarida revealed some of the anxiety being felt by policymakers about the projected transitory nature of US inflation by stating that current inflation levels represent “much more than a 'moderate' overshoot of our 2% longer-run inflation objective”. Despite the pickup in inflation, bond prices remained relatively buoyant. The yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below -1.2%, the lowest ever level since TIPS were launched in 1997. Yield curves flattened further during the week as longer rates fell more than short rates. The US dollar surged, rising to a 16-month high against other major currencies. 

    • UK GDP rose modestly in the third quarter, while inflation keeps the Bank of England (BoE) in the spotlight. Preliminary figures showed that third-quarter GDP rose by 1.3%, below expectations and down from the second quarter’s growth rate of 5.5%. This still left the economy 2.1% below its pre-pandemic level. While consumer spending rose, manufacturing fell marginally, affected by the ongoing supply-chain issues. Currently, consensus forecasts for annual consumer price inflation for October are at 3.8%, above August’s nine-year high of 3.2%. Following last week’s decision not to raise rates, BoE Governor Andrew Bailey stated during the week that the central bank would have to act if the current tight labour market was followed by materially higher wage inflation.

    • The UK government sold gilts at record low negative rates. A £900m 10-year inflation-linked government bond was auctioned by the Debt Management Office during the week, featuring a nominal yield of 0.125% but a real yield of -3.24%. It is now seven years since an inflation-linked gilt was sold at auction with a positive real yield. Demand was strong from pension funds keen to immunise their portfolios against long-term liabilities. Figures from ETFGI show that net flows into inflation-linked bond exchange-traded funds are, at $15.7bn, running at more than double last year’s level in the first nine months of the year.

    • Germany’s ZEW survey saw an unexpected improvement in expectations. The expectations index of the ZEW survey saw an unexpected improvement to 31.7 where 20.0 was expected, the first increase since May 2021. Impressions of current conditions fell again however, to 12.5, two months after its recent modest peak of just 31.9.

    • China’s property sector woes were temporarily alleviated as Evergrande paid its bond coupons. Attention remained on real estate developer Evergrande as it was initially disclosed that the company had failed to make payments within a 30-day grace period to holders of the offshore bond issues that it had failed to service a month ago. However, those payments were ultimately made, seemingly buying the company and the authorities some more time and avoiding a default. However, further downgrades to the debt ratings of Kaisa Group and Shimao Group from global ratings agencies bedevilled the sector. Meanwhile, the Chinese authorities were faced with producer prices rising by 13.5% year on year in October, the steepest rate since 1995.

    Chart of the Week: 10-year US Treasury Inflation-Protected yield

    Chart of the Week: 10-year US Treasury Inflation-Protected yield

    Source: Bloomberg. Data as at 12 November 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 87bp +1
    Bloomberg Euro Corporate Index 89bp 0
    Bloomberg Sterling Non Gilts Index 91bp -1
    Bloomberg US Corporate High Yield Index 280bp -4
    Bloomberg Pan-European High Yield Index 307bp -6
    Bond yields (10yr)
    USA 1.55% +10
    Germany -0.23% +5
    Japan 0.07% +1
    UK 0.92% +8
    EquitiesWeek-to-date change
    S&P 500 4,649 -1.0%
    DJ Euro Stoxx 50 4,358 -0.1%
    FTSE 100 7,384 1.1%
    DAX 16,083 0.2%
    Nikkei 225 29,278 -1.1%
    EUR/USD 1.15 -1.0%
    JPY/USD 114.06 -0.6%
    GBP/USD 1.34 -0.9%
    Brent Crude ($ per barrel) 82.87 +0.2%
    WTI Crude ($ per barrel) 81.59 +0.4%
    Gold ($ per ounce) 1,862.11 +2.4%

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

    Economic calendar

    15 November: Japan GDP Q3 2021, China industrial production
    16 November: UK employment and earnings, US retail sales, US industrial production
    17 November: UK inflation, Japan balance of trade, US housing data
    18 November: US initial jobless claims, Philly Fed data
    19 November: UK retail sales and public sector borrowing, Germany producer price inflation, France unemployment, Japan inflation

    Week to 5 November 2021
    • The US Federal Reserve (Fed) confirmed plans to taper its bond-purchasing scheme. As widely expected, the Fed signalled that it would begin to taper its monthly bond purchasing, reducing its budget by $15bn per month (Treasuries by $10bn and mortgage-backed securities by $5bn) from this month which, if maintained at that level, would bring the programme (currently set at $120bn per month) to an end by June 2022. There was no further guidance on interest rates although the Fed continued to maintain that developments in the job market remained critical. To that end, a new pandemic low in initial jobless claims and a strong ADP private employment report kept market expectations of interest rate hikes high, with the market currently expecting at least two interest rate hikes in 2022. Having risen following the Fed’s announcement on tapering, Treasury yields dropped after the Bank of England (BoE)’s decision not to alter interest rates. 

    • The BoE wrong-footed markets by leaving interest rates unchanged. The BoE’s Monetary Policy Committee voted by 7-2 to leave interest rates unchanged following its November meeting. Expectations had grown in recent weeks, encouraged by statements from both Governor Andrew Bailey and other policy setters at the BoE, that a tightening of monetary policy was close at hand, so much so that a hike in November, from 0.1% to 0.25%, seemed to be a certainty. Bailey responded to criticisms that he had misled markets by stating that interest rates were still likely to rise, possibly in December. However, he pointed to waning wage pressures and rising spare capacity in the medium term as factors likely to cause inflationary pressures to gradually dwindle. Nevertheless, the central bank raised its guidance on inflation, with a new peak target of around 5% by April 2022. The BoE also voted to keep its monthly budget for its bond-purchasing scheme unchanged. Gilt prices surged, with 5-year gilt yields dropping by 25% to 0.6% in short measure, while sterling also dropped sharply on the announcement.

    • UK companies raised prices at the highest rate for decades. According to a report from the IHS Markit manufacturing purchasing managers’ index survey, UK manufacturers have responded to the squeeze on their margins from rising energy prices, staff shortages and supply bottlenecks with the largest increase in prices for over 20 years. The IHS Markit survey on the services sector showed costs and prices in that part of the economy were rising at their highest rate for at least 25 years.

    • Australia abandoned its yield curve policy in a further sign of a move towards tighter monetary conditions. The Reserve Bank of Australia formally ended its policy of targeting a yield of 0.1% for three-year government bonds as the economy has continued to improve and inflation has risen.

    • The European Central Bank (ECB) stated that there would most likely be no rate hike in 2022. In comments made on Wednesday, ECB President Christine Lagarde said that the central bank would most likely not raise interest rates in 2022 as inflation remains relatively low and the economic recovery from the pandemic continues to be fragile. Lagarde also reiterated that the ECB would maintain its bond-purchasing scheme to prevent any unwelcome surge in bond yields and borrowing costs. Bond yields fell in most major eurozone bond markets while market expectations of a rate hike next year were pushed back further towards the end of 2022.

    Chart of the Week: Treasury yields finished the week lower after decisions from the Fed and BoE

    Chart of the Week: Treasury yields finished the week lower after decisions from the Fed and BoE

    Source: Bloomberg. Data as at 5 November 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 86bp -1
    Bloomberg Euro Corporate Index 88bp +1
    Bloomberg Sterling Non Gilts Index 91bp +2
    Bloomberg US Corporate High Yield Index 292bp +5
    Bloomberg Pan-European High Yield Index 316bp +13
    Bond yields (10yr)
    USA 1.53% -3
    Germany -0.22% -12
    Japan 0.07% -3
    UK 0.94% -9
    EquitiesWeek-to-date change
    S&P 500 4,680 1.6%
    DJ Euro Stoxx 50 4,333 1.9%
    FTSE 100 7,280 0.6%
    DAX 16,030 2.2%
    Nikkei 225 29,794 3.1%
    EUR/USD 1.16 0.0%
    JPY/USD 113.76 0.2%
    GBP/USD 1.35 -1.3%
    Brent Crude ($ per barrel) 80.54 -4.6%
    WTI Crude ($ per barrel) 78.81 -5.7%
    Gold ($ per ounce) 1,792.04 +0.5%

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

    Economic calendar

    08 November: Eurozone investor confidence, Japan leading economic indicators
    09 November: US PPI, eurozone economic sentiment, UK retail sales
    10 November: US, China and Germany CPI, US initial jobless claims
    11 November: UK GDP, UK trade balance, UK industrial production
    12 November: Eurozone industrial production, US Michigan consumer sentiment

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