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    Weekly fixed income review: November

    Weekly fixed income review: November

    27 November 2020 Fixed income
    Week to 27 November, 2020
    • 10-year Treasury yields rose over the week.The risk-on trade was in evidence as equity markets rose and bond markets fell, reflecting bullish sentiment towards the latest COVID-19 vaccine news. Further, Joe Biden announced that ex-Federal Reserve chairperson Janet Yellen would be his Treasury Secretary. Her prior record suggests she has a dovish stance towards monetary policy and favours more fiscal stimulus. In economic news, the US manufacturing purchasing managers’ index (PMI) for November showed a bounce to its highest level since September 2014, with output rising, driven by strong growth in new orders. However, initial jobless claims continued to rise for the second week in a row.

    • The eurozone services sector PMI dropped to a six-month low. . Resulting from the renewed restrictions on social and business activity across Europe in the face of the second wave of the coronavirus, demand for services dropped significantly according to flash figures for November. The PMI fell to 41.3, below market expectations and significantly below the important 50.0 level (which separates expansion from contraction). It was also materially lower than October’s figure of 46.9.

    • UK Chancellor Rishi Sunak announced record borrowing for 2020. . In his one-year spending review, Rishi Sunak stated that the UK was on target to borrow almost £400bn this year, with the budget deficit likely to rise to its highest level in peacetime. He forecast a fall in GDP of 11.3% in 2020 – the largest fall ever recorded – followed by a rise of 5.5% in 2021. Although no specific plan of action to tackle the high levels of gross debt or the deficit was mentioned, the chancellor had already announced a freeze in public sector wages. The UK government also announced that the Retail Price Index (RPI) will be brought into line with the Consumer Prices Index including owner occupiers’ housing costs (CPIH), which is typically lower than the RPI, from 2030. This is expected to reduce the future change in RPI from 2030 onwards by 1% per annum. This decision has significant implications for holders of long-dated index-linked gilts, most of which are aligned to RPI.

    • Emerging market debt rallies. Prices of emerging market bonds rose as inflows into the sector turned positive for the first time in eight months. According to data from EPFR, a subsidiary of Informa, the intelligence and research company, flows into the sector totalled $3.5bn in the week to 18 November – the fourth largest figure ever recorded. The growing confidence in the recently announced COVID-19 vaccines has prompted investors to search out riskier and higher yielding assets such as emerging market debt.

    Chart of the Week: Eurozone services PMI

    Chart of the Week: Eurozone services PMI

    Source: Bloomberg. Data as at 27 November 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 107bp -3
    Bloomberg Barclays Euro Corporate Index 93bp -3
    Bloomberg Barclays Sterling Non Gilts Index 102bp -5
    Bloomberg Barclays US Corporate High Yield Index 409bp -13
    Bloomberg Barclays Pan-European High Yield Index 362bp -16
    Bond yields (10yr)
    USA 0.88% +6
    Germany -0.59% -1
    Japan 0.03% +1
    UK 0.28% -2
    EquitiesWeek-to-date change
    S&P 500 3,630 2.0%
    DJ Euro Stoxx 50 3,511 1.2%
    FTSE 100 6,363 0.2%
    DAX 13,287 1.1%
    Nikkei 225 25,537 4.0%
    EUR/USD 1.19 0.5%
    JPY/USD 104.26 -0.4%
    GBP/USD 1.34 0.6%
    Brent Crude ($ per barrel) 47.80 +6.3%
    WTI Crude ($ per barrel) 45.71 +8.4%
    Gold ($ per ounce) 1,815.80 -2.9%

    Source: Bloomberg, 27 November 2020. Prices close of business 26 November 2020.

    Economic calendar

    30 November: Japan unemployment 
    01 December: US ISM manufacturing survey, eurozone CPI, UK house prices  
    02 December: Eurozone unemployment, eurozone PPI 
    03 December: US initial jobless claims, eurozone retail sales 
    04 December: US non-farm payrolls, US unemployment 

    Week to 20 November, 2020
    • The US Federal Reserve (Fed) recommitted to supportive monetary policy. In an interview during the week, the Fed’s vice-chairman Richard Clarida stated that the central bank was “committed to using all of our available tools”. This provided some comfort to markets that have recently been unsettled by the continual delay to the expected announcement of further support from the Fed. Clarida went on to mention that “large-scale asset purchases” were very much part of the Fed’s weaponry. This was picked up by some commentators as meaning that the Fed was likely to maintain, or potentially increase, its bond-purchasing programme, currently set at $80bn per month. The 10-year Treasury yield declined over the week.

    • UK consumer inflation increased further in October. The inflation rate rose by 0.7% on an annual basis, having previously by 0.5% in September and 0.2% in August. Clothing prices recovered, while the prices of some food items and second-hand cars also rose. The inflation rate remains a long way below the Bank of England’s 2% medium-term target and expectations are that inflation will likely remain subdued for the foreseeable future. Annual core inflation rose from 1.3% in September to 1.5% in October. UK gilt yields generally softened a little over the week.

    • In the eurozone, the spread between 10-year Italian BTP and German Bund yields shrank further. Italian government bond prices continued to rally through much of the week, largely due to market expectations that the European Central Bank will likely provide further stimulus shortly through increased bond purchases and cheap loans to commercial banks; this would provide support for highly indebted nations such as Italy. This rally in bond prices saw the spread between Italian and German government bond yields fall below 1.2%, the lowest level since early 2018. Greek 10-year government bond prices were also supported by the growing likelihood of further central bank stimulus, with the 10-year yield falling below 0.65%, its lowest-ever level.

    • Japanese GDP rebounded by 5% in the third quarter. After three consecutive quarters of decline, GDP in Japan rose by 5% on a quarterly basis, and by 21.4% on an annualised one, in the third quarter of this year. Private consumption was the key driver of the rebound while private capital expenditure contracted at a softer pace. 10-year JGB yields fell over the week.

    • Several corporate bond issues were cancelled in China, adding to nervousness in the local bond market. A number of planned new corporate bond issues were shelved this week owing to defaults from various state-owned enterprises (SOEs). This followed news that that technology company Tsinghua Unigroup had missed a bond payment on a CNY1.3bn issue. Last week, Yongcheng Coal & Electricity defaulted on CNY1.0bn of debts, and this followed other high-profile SOE defaults over recent weeks. It has called into question whether certain SOEs are safe investments and whether either the local or national government will stand behind them and guarantee their debt.


    Chart of the Week: 10-year UK gilt yield year-to-date (%)

    Chart of the Week: 10-year UK gilt yield year-to-date (%)

    Source: Bloomberg. Data as at 20 November 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 109bp -5
    Bloomberg Barclays Euro Corporate Index 96bp -3
    Bloomberg Barclays Sterling Non Gilts Index 107bp -4
    Bloomberg Barclays US Corporate High Yield Index 422bp -13
    Bloomberg Barclays Pan-European High Yield Index 379bp -14
    Bond yields (10yr)
    USA 0.83% -7
    Germany -0.57% -2
    Japan 0.02% -1
    UK 0.32% -2
    EquitiesWeek-to-date change
    S&P 500 3,582 -0.1%
    DJ Euro Stoxx 50 3,452 0.6%
    FTSE 100 6,334 0.3%
    DAX 13,086 0.1%
    Nikkei 225 25,634 1.0%
    EUR/USD 1.19 0.3%
    JPY/USD 103.74 0.9%
    GBP/USD 1.33 0.5%
    Brent Crude ($ per barrel) 44.20 +3.3%
    WTI Crude ($ per barrel) 41.74 +4.0%
    Gold ($ per ounce) 1,866.54 -1.2%

    Source: Bloomberg, 20 November 2020. Prices close of business 19 November 2020.

    Economic calendar

    23 November: US, UK and eurozone PMI data
    24 November: US consumer confidence index
    25 November: US durable goods orders, US jobless claims,
    26 November: Japan leading economic indicators, Japan CPI
    27 November: Eurozone consumer confidence index, UK housing prices

    Week to 13 November, 2020
    • US government bond yields jumped on Joe Biden’s presidential election victory and Pfizer’s vaccine announcement. Following confirmation that Joe Biden had won the US presidential election, government bond yields jumped, with the 10-year Treasury yield rising to above 0.95%. The ‘risk-on’ rally in US equities saw US Treasuries sell off and yields rise, reflecting relief that a clear winner had come through after days of uncertainty, even though Donald Trump is still to concede defeat. However, it appeared that Congress would be divided, with the Republicans expected to maintain control of the Senate and the Democrats likely to have a majority in the House of Representatives. The announcement by Pfizer that its vaccine, in phase three, was 90% effective in immunisation against COVID-19 provided further impetus to the rally. Corporate credit and high yield bond prices rallied alongside equities, with corporate spreads tightening 11bp to 111bp. Energy, aerospace, travel and leisure were the best performers on the vaccine hopes. There was also a pick-up in new issuance with Westpac, Verizon Communications, and Principal Financial all issuing.

    • The UK announced that it would issue its first-ever green sovereign bonds. The UK chancellor Rishi Sunak announced that the UK government would issue green gilts to help the recovery from COVID-19 and fund the transition towards greener energy. This follows green bond issues from several European neighbours such as Germany and Holland. Additionally, the issuance of green bonds is aimed at satisfying the demand from UK pension funds for more green investments.

    • UK unemployment jumped to a near-four-year high. The three-month unemployment rate to the end of September rose to 4.8% from 4.5% in the previous month, as companies shed more staff owing to the impact on businesses from the COVID-19 pandemic and the tapering of the government’s furlough scheme. The third quarter also witnessed the highest ever increase in redundancies (314,000) since records began. Gilt yields rose, however, in line with those in other global bond markets, owing to the Biden election victory and hopes regarding the Pfizer vaccine.

    • The European Central Bank (ECB) is likely to target bond purchases and cheap loans in its much-awaited package of measures. ECB President Christine Lagarde stated that the central bank’s forthcoming stimulus package would most likely feature emergency bond purchases and cheap loans to banks, as it assesses its options faced with a second wave of the pandemic. Expectations are growing that the ECB will expand both its pandemic emergency purchase programme and targeted longer-term refinancing operations while keeping its deposit rate unchanged. Government bond yields fell back in the eurozone following the statement, having risen early in the week on the US election result and the Pfizer vaccine announcement.


    Chart of the Week: 10yr German Bund yield over 12 months

    Chart of the Week: 10yr German Bund yield over 12 months

    Source: Bloomberg. Data as at 13 November 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 111bp -6
    Bloomberg Barclays Euro Corporate Index 97bp -11
    Bloomberg Barclays Sterling Non Gilts Index 112bp -5
    Bloomberg Barclays US Corporate High Yield Index 412bp -30
    Bloomberg Barclays Pan-European High Yield Index 387bp -39
    Bond yields (10yr)
    USA 0.90% +8
    Germany -0.54% +9
    Japan 0.03% +1
    UK 0.35% +7
    EquitiesWeek-to-date change
    S&P 500 3,550 +1.2%
    DJ Euro Stoxx 50 3,428 +7.0%
    FTSE 100 6,339 +7.3%
    DAX 13,053 +4.6%
    Nikkei 225 25,521 +4.9%
    EUR/USD 1.18 -0.6%
    JPY/USD 105.20 -1.8%
    GBP/USD 1.31 -0.2%
    Brent Crude ($ per barrel) 44.27 +12.2%
    WTI Crude ($ per barrel) 42.02 +13.1%
    Gold ($ per ounce) 1,881.54 -3.6%

    Source: Bloomberg, 13 November 2020. Prices close of business 12 November 2020.

    Economic calendar

    16 November: Japan industrial production
    17 November: US retail sales, US industrial production
    18 November: UK CPI, eurozone CPI, US housing starts
    19 November: US jobless claims, Japan CPI
    20 November: UK retail sales, eurozone consumer confidence index

    Week to 6 November, 2020
    • US bond yields dropped as the US presidential election produced an initially inconclusive result. After spiking at nearly 0.95%, the 10-year US Treasury yield dropped below 0.75% as it became clear that the election was much closer than had been expected; indeed, Donald Trump falsely claimed victory and threatened legal action if he lost. However, it appeared that the tide was gradually turning in Joe Biden’s favour as postal votes were counted, which prompted a rally in both equities and bonds, even though the final result may not be known until next week. 

    • The Bank of England raised its monthly bond-purchasing budget by £150bn. Following November’s meeting of the Monetary Policy Committee, the bank decided to raise the level of its bond-buying programme from £745bn to £895bn. The increase is aimed at supporting the economy, particularly, in the bank’s words, consumer spending, through the winter months and in the face of a likely double-dip recession. Interest rates were left unchanged.

    • UK borrowing is surging. New forecasts from the Centre for Economics and Business Research suggest that government borrowing will rise to £500bn this year as a result of the second lockdown and consequent extension of the furlough scheme, weak domestic and overseas demand, and dwindling tax receipts. UK bond yields fell sharply towards the end of the week, close to the recent lows of mid-October.

    • The outlook for economic growth in the eurozone was cut. The eurozone’s GDP forecast for the fourth quarter of this year has been reduced by two investment banks. Goldman Sachs cut its forecast of growth of 2.2% to a fall of 2.3% while Morgan Stanley’s cut was more modest. Both banks highlighted the negative impact of rising coronavirus cases and renewed lockdowns on economic activity. This implies, in their view, a more drawn out recovery going forward. Bond yields fell in most major eurozone bond markets, with the 10-year Italian bond yield falling to a new all-time low of 0.61%.

    • The Reserve Bank of Australia cut interest rates. The central bank reduced its key interest from 0.25% to 0.1% – a new all-time low. The bank stated that Interest rates are likely to remain there until inflation moves back into the 2-3% target range (the latest monthly inflation figure, for August, showed just 0.7% annual growth). At the same time, the bank announced that it would purchase up to A$100bn of government bonds, mostly in the 5-year and 10-year maturity range, over the next six months.

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

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

    Source: Bloomberg. Data as at 06 November 2020

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 119bp -6
    Bloomberg Barclays Euro Corporate Index 110bp -6
    Bloomberg Barclays Sterling Non Gilts Index 118bp -3
    Bloomberg Barclays US Corporate High Yield Index 436bp -73
    Bloomberg Barclays Pan-European High Yield Index 430bp -41
    Bond yields (10yr)
    USA 0.76% -11
    Germany -0.64% -1
    Japan 0.02% -2
    UK 0.23% -3
    EquitiesWeek-to-date change
    S&P 500 3,510 +7.4%
    DJ Euro Stoxx 50 3,216 +8.7%
    FTSE 100 5,906 +5.9%
    DAX 12,568 +8.8%
    Nikkei 225 24,105 +4.9%
    EUR/USD 1.18 +1.5%
    JPY/USD 103.49 +1.1%
    GBP/USD 1.31 +1.6%
    Brent Crude ($ per barrel) 40.93 +9.3%
    WTI Crude ($ per barrel) 38.79 +8.4%
    Gold ($ per ounce) 1,949.66 +3.8%

    Source: Bloomberg, 06 November 2020. Prices close of business November 05, 2020.

    Economic calendar

    November 09: Japan leading economic indicators, eurozone trade balance
    November 10: UK unemployment rate, eurozone industrial production
    November 11: Japan machinery orders, Japan PPI
    November 12: US jobless claims, US CPI, UK trade balance
    November 13: Eurozone CPI, US PPI, US consumer sentiment index

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