Weekly fixed income review

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

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. 

A credit default swap (CDS) provides a measure of protection against defaults of debt issuers but there is no assurance their use will be effective or will have the desired result.

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

Derivatives may be used to generate returns as well as to reduce costs and/or the overall risk of the portfolio. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.

Investments in emerging markets can be less liquid and riskier than more developed markets and difficulties in accounting, dealing, settlement and custody may arise.

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

The investment manager may invest in instruments which can be difficult to sell when markets are stressed.

Where leverage is used as part of the management of the portfolio through the use of swaps and other derivative instruments, this can increase the overall volatility. While leverage presents opportunities for increasing total returns, it has the effect of potentially increasing losses as well. Any event that adversely affects the value of an investment would be magnified to the extent that leverage is employed by the portfolio. Any losses would therefore be greater than if leverage were not employed.

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