507A7B86-7507-41CB-8F0A-9AD191E32DA5 64A7790B-23B8-4FDB-B6C9-BC79573952FF 513D0B9D-7474-4D61-863F-70F1B3696FB7 60F0322F-B5F4-4A4F-B505-A8773B90F3B9 Comments A5B32EC7-3D41-482F-8D63-40B8CC4B0807 86DDA3D7-F193-4FF9-BE89-5AF7F4C92A8F 1FAE3C2F-8600-47BE-8D04-C46DC4FFD6B0 47ACF625-4F24-4613-9C4E-5E81CABE1FBA FB57FEB0-874D-4585-BF2D-FAAE8EBC17F6 AD97905C-02C9-4A07-9EEA-DA1F36CC7FA8 8727CDE7-CFD1-40EA-A8AF-256882E677CA B052573C-CEE4-4CD1-B86F-C9CB0202622C 1FDA88B9-6396-4BE0-B01D-4DC4FA38A632 6CD0F19E-3C61-44FC-9723-C7737416CD7C 62D3F811-1C6C-477C-972B-FE52539070FC•• 1FAE3C2F-8600-47BE-8D04-C46DC4FFD6B0 47ACF625-4F24-4613-9C4E-5E81CABE1FBA FB57FEB0-874D-4585-BF2D-FAAE8EBC17F6 EF459BAF-1347-4C71-9008-BDB3136FCCE8 3BB10396-3999-4821-82D8-3568DE598D06 F3D95CB7-5CF3-4B27-8B55-AA78EDF89759 63057605-E453-4FDE-89BC-ABD2BC6600E2 Views 6CD0F19E-3C61-44FC-9723-C7737416CD7C
    image image

    Weekly fixed income review: September

    Weekly fixed income review: September

    25 September 2020 Fixed income
    Week to 25 September, 2020
    • Following the US Federal Reserve’s downward revision to economic forecasts last week, Chairman Jerome Powell called for greater fiscal spending. He stated, at Congress’s Financial Services Committee, that the economy needed further fiscal packages in order to help both businesses and individuals, especially struggling smaller businesses and low-income households. In a blunt assessment of current fiscal spending, he emphasised that more should be done, and that both monetary and fiscal policy should be working in tandem to boost the economy. Both short and long-term US Treasury yields rose towards the end of the week.
    • Selling pressure in US high yield bonds rose dramatically over the week. US high yield experienced the highest net outflows since March, reflecting concern around the pace of economic recovery in the US. Net selling of junk bonds amounted to nearly $5bn, based on figures from EPFR Global, causing the average yield on US junk bonds to rise to over 5.8%.
    • Bank of England (BoE) governor Andrew Bailey ruled out negative interest rates in the near-future. Despite widespread speculation that the BoE was close to pulling the trigger on negative interest rates, Andrew Bailey suggested, in a speech to the British Chambers of Commerce, that while the BoE was looking at the practicalities around such a move, it had ruled out any imminent move towards negative interest rates. At the same time, Bailey warned that the economy would face a very tough final quarter of the year as coronavirus restrictions are reimposed.
    • The European Central Bank (ECB) announced that it would be reviewing its current measures employed to support the economy. The review is likely to take place at the ECB’s council meeting next month and will focus particularly on the current monthly bond-purchasing scheme, and whether to extend it or begin to gently reduce the level of purchases. This review had been expected following the increase in the Pandemic Emergency Purchase Programme budget, last June, to its current level of €1.35trn. Additionally, the ECB is increasingly calling for the EU’s €750bn Recovery Fund to be made permanent.
    • Eurozone government bond yields fell in aggregate as economic sentiment weakened. Italian 10-year BTP yields fell to levels not seen since last September, while the 30-year BTP yield fell to a record low of 1.75%, as worries mounted about the fragile state of the economy in Europe, especially as coronavirus cases mount. The rally in Italian BTP prices also partly reflected the results from regional elections that witnessed a disappointment for the ruling League party, and hence, less likelihood of new and divisive national elections. Spreads between Italian BTPs and German Bunds narrowed even as German and other eurozone countries’ government bond yields fell.
    • The Chinese government announced that it would reduce restrictions on foreign bond investment. The People’s Bank of China stated, in draft guidelines, that it would ease some of the red tape that exists preventing overseas investors from investing in Chinese bonds. At the same time, a report from Morgan Stanley showed that the Chinese government bond market was very close to being included in the FTSE World Government Bond Index.

    Chart of the Week: German/Italian 10-year government bond yield spreads

    Chart of the Week: German/Italian 10-year government bond yield spreads

    Source: Bloomberg. Data as at 25 September 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 132bp +4
    Bloomberg Barclays Euro Corporate Index 117bp +4
    Bloomberg Barclays Sterling Non Gilts Index 126bp +2
    Bloomberg Barclays US Corporate High Yield Index 519bp +29
    Bloomberg Barclays Pan-European High Yield Index 442bp +22
    Bond yields (10yr)
    USA 0.67% -2
    Germany -0.50% -2
    Japan 0.01% 0
    UK 0.22% +4
    EquitiesWeek-to-date change
    S&P 500 3,255 -1.9%
    DJ Euro Stoxx 50 3,160 -3.8%
    FTSE 100 5,823 -3.1%
    DAX 12,607 -3.9%
    Nikkei 225 23,088 -1.2%
    Currencies
    EUR/USD 1.17 -1.5%
    JPY/USD 105.43 -0.8%
    GBP/USD 1.27 -1.4%
    Commodities
    Brent Crude ($ per barrel) 41.74 -3.3%
    WTI Crude ($ per barrel) 40.02 -2.7%
    Gold ($ per ounce) 1,872.15 -4.0%

    Source: Bloomberg, 25 September 2020. Prices close of business 24 September 2020.

    Economic calendar

    28 September: Japan leading economic indicator
    29 September: Eurozone CPI, US consumer confidence index
    30 September: US GDP (Q2), UK GDP (Q2), Japan Tankan survey
    1 October: Eurozone industrial production, US initial jobless claims
    2 October: US non-farm payrolls, US factory orders

    Week to 18 September, 2020
    • The US Federal Reserve (Fed) projects no change to its policy until late 2023. The Fed said it is committed to keeping the target range for the federal funds rate at 0-0.25% until “labour market conditions have reached levels consistent with the Committee's assessment of maximum employment”. In data released by the Fed, the projections of its committee members foresee 'maximum employment' occurring in 2023. The Fed reiterated it would be content to see inflation above its long-term target of 2% for a sustained period before raising interest rates. It also revised its economic outlook, with its forecast for this year’s GDP raised from a contraction of 6.5% to one of just 3.7%. However, at the same time, it slightly lowered its forecasts beyond 2020. The 10-year Treasury yield fell on the news but was slightly higher over the week.
    • US retail sales weakened in August. Although the figure for August rose 0.6% over the month, this continued a weakening trend in the growth rate evident since the marked rebound in retail sales in May. With unemployment claims rising, this led to calls from several observers, including Fed chairman Jerome Powell, for increased fiscal spending from the US government. Corporate spreads tightened 2bp to 128bp as equity volatility settled down. We are seeing a surge in tender and exchange, which is reducing supply of short-dated paper and steepening the credit curve. New issuance was again around $50 billion, though deals were generally well received.
    • Economic sentiment in the eurozone rose substantially in September. The ZEW Economic Sentiment Index rose to a 16-year high, reflecting rising optimism around the trend in economic growth. This follows the loosening of Covid-19-related restrictions and comes despite the recent pickup in new coronavirus cases. Bond yields in the eurozone were largely unchanged over the week.
    • The Bank of England discussed the implementation of negative interest rates at its policy meeting on Thursday. The minutes of the Monetary Policy Committee meeting revealed that there had been an active discussion around negative interest rates and their likely impact on the economy. Gilt yields and sterling both fell as a result. Nevertheless, the central bank kept interest rates and the scale of its monthly bond-purchasing scheme unchanged. Meantime, consumer inflation fell to just 0.2% year-on-year in August, the lowest rate since late 2015 but heavily influenced by the ‘eat-out-to-help-out’ scheme, as well as a VAT cut for the hospitality sector. However, core inflation was higher, at 0.9% year-on-year, ahead of expectations.
    • Foreign inflows into Asian bond markets slowed in August. This was the third successive month that net flows into Asian bonds had slowed and reflects investors’ concerns around economic growth in the region, as well as the ongoing trade issues between China and the US and their impact on the wider Asian region. According to figures from local banks and bond market associations, net inflows fell from nearly $4bn in July to less than $0.5bn in August. Government bond yields in China, South Korea and Thailand all rose towards the end of the week.
    • The World Bank has put more pressure on creditors to offer debt relief for emerging countries. The World Bank’s president stated this week that he wanted to see greater debt forgiveness from large commercial creditors to emerging economies, as debt servicing threatens to overwhelm certain countries. The urgency of this comes as COVID-19 causes national debts to rise substantially across the globe.

    Chart of the Week: The Fed’s forecast of US economic recovery

    Chart of the Week: The Fed’s forecast of US economic recovery

    Source: Federal Reserve. Data as at 16 September 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 128bp -3
    Bloomberg Barclays Euro Corporate Index 114bp -1
    Bloomberg Barclays Sterling Non Gilts Index 125bp -1
    Bloomberg Barclays US Corporate High Yield Index 488bp -8
    Bloomberg Barclays Pan-European High Yield Index 420bp -3
    Bond yields (10yr)
    USA 0.69% +2
    Germany -0.49% -1
    Japan 0.02% -1
    UK 0.19% 0
    EquitiesWeek-to-date change
    S&P 500 3,357 +0.5%
    DJ Euro Stoxx 50 3,317 0%
    FTSE 100 6,050 +0.3%
    DAX 13,208 0%
    Nikkei 225 23,319 -0.4%
    Currencies
    EUR/USD 1.18 0%
    JPY/USD 104.74 +1.4%
    GBP/USD 1.30 +1.4%
    Commodities
    Brent Crude ($ per barrel) 43.30 +8.7%
    WTI Crude ($ per barrel) 40.97 +9.8%
    Gold ($ per ounce) 1,944.44 +0.2%

    Source: Bloomberg, 18 September 2020. Prices close of business 17 September 2020.

    Economic calendar

    22 September: US Redbook Index, UK CBI Industrial Trends survey
    23 September: US, UK, eurozone and Japan preliminary PMIs for September
    24 September: US initial jobless claims
    25 September: US durable goods orders, eurozone Consumer Confidence Index

    Week to 11 September, 2020
    • US Treasury prices rose over the week as investors sought the safety of government bonds. Significant volatility in equity markets, driven by technology stocks, saw greater investor interest in Treasuries. Meanwhile, the US Treasury was busy during the week, auctioning debt at both the long and short ends of the yield curve, as they stepped up issuance to fund increasing outlays stemming from measures to support the economy through the coronavirus crisis. The auction of a record $50bn of three-year Treasuries, early in the week, attracted strong interest.
    • German Bunds sold off towards the end of the week as equity markets rallied. Yields had fallen mid-week as investors digested the news of a dramatic fall in eurozone employment levels. This move reversed towards the end of the week, ahead of the central bank’s policy meeting, in which the European Central Bank confirmed that the current easy monetary policy would remain in place. This message disappointed market hopes of further stimulus.
    • Gilt yields continued to fall through the week on growing anxiety around Brexit. The UK’s seemingly hardening stance towards Brexit negotiations caused both equities and sterling to fall, and gilt prices to rise, as investors fled risk assets. Sterling fell from $1.33 to $1.28 against the dollar, and from €1.12 to €1.08 against the euro, as traders discounted the rising risks of no trade deal between the EU and the UK. In particular, the UK government’s suggestion that elements of the Withdrawal Agreement need to be amended created deep uncertainty. A renewed tightening of coronavirus-related restrictions added to the ‘risk-off’ sentiment around the UK market.
    • South Africa experienced a spectacular drop in GDP in the second quarter. GDP fell by 52% on an annualised basis (by 16.4% over the quarter), in the April to June quarter – the worst fall in 30 years – as Covid-19 wreaked havoc on the country’s economy. This marked the fourth consecutive fall in quarterly GDP, extending the recession. Weakness in the manufacturing and mining segments of the economy were the key factors behind the decline. The rand sold off on the news before recovering some of the decline by the end of the week.
    • Corporate spreads generally widened over the week. US spreads widened, largely due to over $50 billion in new issuance, though deals were generally well received. Anglo American, Smithfield, International Flavor, Shell, JP Morgan and many others issued. In Europe, market weakness was more focused, with UK risk, corporate hybrids and oil names all performing poorly. UK banks and insurers underperformed meaningfully as a result of increasing tensions between the UK and the EU.

    Chart of the Week: Brexit concerns cause gilt yields to decline

    Chart of the Week: Deflation occurred in the euro area for the first time in four years.

    Source: Bloomberg. Data as at 11 September 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 131bp +2
    Bloomberg Barclays Euro Corporate Index 114bp -1
    Bloomberg Barclays Sterling Non Gilts Index 125bp +1
    Bloomberg Barclays US Corporate High Yield Index 493bp +5
    Bloomberg Barclays Pan-European High Yield Index 418bp -9
    Bond yields (10yr)
    USA 0.68% -4
    Germany -0.43% +4
    Japan 0.03% -1
    UK 0.23% -4
    EquitiesWeek-to-date change
    S&P 500 3,339 -2.6%
    DJ Euro Stoxx 50 3,313 +1.6%
    FTSE 100 6,003 +3.5%
    DAX 13,209 +2.9%
    Nikkei 225 23,235 +0.1%
    Currencies
    EUR/USD 1.18 -0.2%
    JPY/USD 106.13 +0.1%
    GBP/USD 1.28 -3.6%
    Commodities
    Brent Crude ($ per barrel) 40.06 -6.1%
    WTI Crude ($ per barrel) 37.30 -6.2%
    Gold ($ per ounce) 1,946.09 +0.6%

    Source: Bloomberg, 11 September 2020. Prices close of business 10 September 2020.

    Economic calendar

    14 September: Japan industrial production
    15 September: UK unemployment rate, eurozone CPI
    16 September: UK RPI and CPI, US retail sales 
    17 September: US Philly Fed Manufacturing survey, US housing starts
    18 September: UK retail sales, eurozone PPI, US Consumer Sentiment survey

    Week to 4 September, 2020
    • US Treasury yields fell across the curve. Yields moved lower as concerns about the sustainability of the equity market rally increased, leading investors to search for safe haven trades. These fears were a result of increasing market volatility and a sharp decline in technology stocks on Thursday. It was reported that Apple recorded the largest one-day loss in market value for a US listed company in history at $179.92bn. Hopes of further fiscal stimulus measures which would result in a significant increase in supply was not sufficient to deter investors from the Treasury market.
    • Inflation in the eurozone fell to -0.2% in August. The average figure for all 19 eurozone countries fell below zero (on an annual basis) for the first time in over four years, and was worse than expected. Core inflation fell to 0.4% too, the lowest level ever recorded. Government bond yields fell across the eurozone, as fixed income markets speculated on the likelihood of further monetary stimulus from the European Central Bank to fight deflation. The Central Bank also signalled its concern about the sustained strength of the euro, leading to a fall in the currency on the back of this news.
    • US corporate bond issuance reached a new all-time high during the week. New issues drove total issuance to $1.919trn year to date, higher than 2017’s previous annual record of $1.916trn, according to figures from Refinitiv. Companies are making the most of the prevailing low interest-rate environment to raise debt. Potentially, there could be $140bn of total issuance in September. Despite the new supply, corporate spreads tightened 4bp to 126bp. Demand for investment grade paper continues to be strong as investors search for incremental yield given ultra-low nominal interest rates. The real yields on several short-dated (1-3 years) US Investment grade bonds turned negative.
    • There was strong demand for Germany’s first-ever green bond issue. The €6bn 10-year government bond issue was nearly six times oversubscribed. This continues a recent trend of government green bond issues across Europe, with Sweden also issuing a green bond this week. Germany plans to issue up to €12bn in such bonds this year.

    Chart of the Week: Deflation occurred in the euro area for the first time in four years.

    Chart of the Week: Deflation occurred in the euro area for the first time in four years.

    Source: Eurostat. Data as at 04 September 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 128bp -2
    Bloomberg Barclays Euro Corporate Index 114bp 0
    Bloomberg Barclays Sterling Non Gilts Index 124bp +1
    Bloomberg Barclays US Corporate High Yield Index 480bp +5
    Bloomberg Barclays Pan-European High Yield Index 426bp -10
    Bond yields (10yr)
    USA 0.63% -9
    Germany -0.49% -8
    Japan 0.04% -2
    UK 0.24% -7
    EquitiesWeek-to-date change
    S&P 500 3,455 -1.5%
    DJ Euro Stoxx 50 3,304 -0.3%
    FTSE 100 5,851 -1.9%
    DAX 13,058 +0.2%
    Nikkei 225 23,466 +2.5%
    Currencies
    EUR/USD 1.19 -0.4%
    JPY/USD 106.19 -0.8%
    GBP/USD 1.33 -0.5%
    Commodities
    Brent Crude ($ per barrel) 44.07 -2.2%
    WTI Crude ($ per barrel) 41.37 -3.7%
    Gold ($ per ounce) 1,930.91 -1.7%

    Source: Bloomberg, 04 September 2020. Prices close of business 03 September 2020.

    Economic calendar

    7 September: eurozone industrial production, UK retail sales, Japan leading economic index
    8 September: eurozone trade balance, eurozone retail sales
    9 September: Japan machinery orders
    10 September: US jobless claims, US PPI
    11 September: US CPI, eurozone CPI, UK trade balance

    Back to top