Weekly fixed income review

Week to 11 December 2020

  • In the US, Congress continued to mull over stimulus measures. Under pressure from a wide range of interested parties, not least the US Chamber of Commerce which stated that a new package was “desperately needed”, politicians continued to debate the issue, with little immediate sign of resolution. The government made a fresh proposal of $916bn of fresh stimulus to Congress during the week, not dissimilar to the proposal of $908bn recently made by a bipartisan group. US Treasury yields declined over the week, with investors concerned about the impasse.

  • The growing likelihood of a no-deal Brexit drove bond yields lower. The 10-year gilt yield fell below 0.20%, the lowest level in almost two months, as it appeared increasingly likely that the UK’s Brexit transition period would end without a trade deal with the EU. Sterling was volatile but generally weaker over the week. Meanwhile, pressure was building on the government to provide further support to the economy in the event of a no deal, and following subdued GDP growth in October, which showed the economy rising just 0.4% month on month – the slowest rate of growth since May.

  • In Europe, bond yields hit new lows in some countries. Fears over the economic outlook, a no-deal Brexit and record daily new COVID-19 cases in Germany created nervousness among investors. Third-quarter GDP in the eurozone was also revised marginally lower. After the past few weeks’ exuberance over the announcements of the vaccines, the market took on a decidedly ‘risk-off’ mood over the week. The 10-year Spanish and Italian government bond yields hit new all-time lows, while Portugal’s 10-year bond yield went negative for the first time (see Chart below). German and French bond yields also fell. At its December policy meeting, the European Central Bank raised the budget of its Pandemic Emergency Purchase Programme by a further €500bn to a total of €1.85trn, while extending the programme to “at least the end of March 2022”. The central bank also cut its 2021 forecast for eurozone GDP growth from 5.0% to 3.9%.

  • The Japanese government unveiled fresh stimulus. The government announced a further $294bn of support measures for the economy. The fresh stimulus, the third package announced this year, is targeted at projects such as green technology and digitisation, with the aim of helping to get the economy up to speed post the COVID-19 period. Japanese bond yields generally fell, in line with other global bond markets.

  • The Australian government launched its first-ever issue featuring negative interest rates. Australia joined the growing band of countries to have gone down the path of issuing bonds with negative interest rates. The country launched a A$1.5bn three-month bill which was taken up by some investors at a yield of -0.1% and was more than five times oversubscribed.

Chart of the Week: Portugal’s 10-year bond moves negative for the first time (%)

Source: Bloomberg. Data as at 11 December 2020. 

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 103bp +3
Bloomberg Barclays Euro Corporate Index 92bp 0
Bloomberg Barclays Sterling Non Gilts Index 99bp -1
Bloomberg Barclays US Corporate High Yield Index 379bp +2
Bloomberg Barclays Pan-European High Yield Index 345bp +2
Bond yields (10yr)
USA 0.91% -6
Germany -0.60% -6
Japan 0.02% -1
UK 0.20% -15
EquitiesWeek-to-date change
S&P 500 3,668 -0.8%
DJ Euro Stoxx 50 3,522 -0.5%
FTSE 100 6,600 0.8%
DAX 13,296 0.0%
Nikkei 225 26,756 0.0%
EUR/USD 1.21 0.1%
JPY/USD 104.24 -0.1%
GBP/USD 1.33 -1.1%
Brent Crude ($ per barrel) 50.25 +2.0%
WTI Crude ($ per barrel) 46.78 +1.1%
Gold ($ per ounce) 1,836.57 -0.1%

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

Economic calendar

14 December: Japan industrial production
15 December: UK unemployment, US industrial production   
16 December: UK CPI, US retail sales, US, UK and eurozone PMI
17 December: US housing starts, US jobless claims, eurozone and Japan CPI
18 November: UK retail sales, German IFO business climate 

Important information

The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance.

Investments in bonds are affected by interest rates and inflation trends which may affect the value of the portfolio.

Where the portfolio holds over 35% of its net asset value in securities of one governmental issuer, the value of the portfolio may be profoundly affected if one or more of these issuers fails to meet its obligations or suffers a ratings downgrade. 

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