Weekly fixed income review

Market review: week to 11 October 2019

  • Key developed market bond yields generally pushed higher over the week on easing geopolitical concerns. In the UK, gilt prices softened amid increasing optimism for a favourable outcome in Brexit negotiations. UK PM Boris Johnson and Irish PM Leo Varadkar met for talks on Thursday over the Brexit deadlock and struck a positive tone, agreeing that they “could see a pathway to a possible deal. US-China trade talks also appear to be gradually edging towards some form of narrow deal, despite ongoing headline volatility, which is also contributing toward the improving sentiment.
  • US economic data was mixed, with labour market data remaining buoyant while inflation and activity data disappointing. Non-farm payrolls increased by a net 136,000 in September, following a revised print of 168,000 in August, while the unemployment rate has now reached the lowest level in 50 years at 3.5%, down from 3.7% in August. Inflation remains subdued with both PPI and CPI prints surprising to the downside. Markets are currently pricing in a roughly 70% chance of a further cut at the October FOMC meeting.
  • The ECB Governing Council appears to be divided on the contents of the latest easing package announced by President Mario Draghi in September. The minutes of the meeting point to a wide range of opinion, with some preferring rate cuts over additional bond purchases and others querying the rationale for further rate cuts at all. EUR duration is trading weaker ahead of Christine Lagarde’s presidency in December, with the market uncertain about her likely reaction function in the context of the ongoing Governing Council division.
  • US corporate spreads widened 1 basis point (bp) to 119bp with significant daily volatility, as markets were whipped around by duelling trade headlines as US and China representatives sat down for meetings. Earnings begin next week with big banks reporting. Expectations for the third quarter have been coming down and we expect greater financial issues after earnings. There was minimal USD issuance apart from Keysight Technology, so the Italian Government took advantage of the quiet period to issue its first dollar denominated debt in over a decade.

Chart of the Week: Fed Funds implied cut/hike/no change probabilities for October 30th meeting

Chart of the Week Fed Funds implied cut hike no change probabilities for October 30th meeting_11_October 2019

Source: Bloomberg. Data as at 11 October 2019.

Bloomberg statistics_11_Oct_2019

Source: Bloomberg, 11 October 2019

Economic calendar

14 October: China trade data
15 October: UK ILO unemployment rate; German ZEW Survey
16 October: Canadian CPI data
17 October: Australia employment data
18 October: China GDP

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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The issuer of a debt security may not pay income or repay capital to the bondholder when due.

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Where high yield instruments are held, their low credit rating indicates a greater risk of default, which would affect the value of the portfolio.

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