Weekly fixed income review

Week to 14 August 2020

  • US Treasury yields rose as investors rotated into equities. Demand for equities coincided with weekly initial jobless claims falling below a million for the first time since the start of the pandemic. There was also the resumption of talks on a new coronavirus stimulus package, as cases continue to rise in the US. The yield on the 10-year benchmark bond rose to 0.72% with some selling pressure came from core inflation picking up from 1.2% in June to 1.6% in July. The US government raised $112bn via auctions of three, 10- and 30-year bonds to help fund fiscal stimulus; the former two auctions (of $48bn and $38bn, respectively) saw strong demand, but the latter (for $26bn) was less well received.
  • The UK economy entered recession. Second-quarter GDP contracted 20.4% sequentially (and 21.7% year-on-year), largely due to a collapse in activity in the service sector as the country entered lockdown. The country suffered the worst slump of any major European economy during the period. However, the economy grew by 8.7% month-on-month in June as government restrictions were gradually eased, with the 10-year gilt yield rising 10bp to 0.24% over the week.
  • The EU’s AAA credit rating is secure for now, according to rating agencies Moody’s and Fitch. This follows the bloc’s plan to issue €750 billion of bonds to fund its Covid-19 recovery fund. This is despite large divisions between member states over how much of the money should be paid as grants or loans.
  • Brazil’s reform agenda has come into question. The sudden departure of two top government officials from Jair Bolsonaro’s administration has cast doubt on economic reforms. The future of finance minister Paulo Guedes is now uncertain. The turbulence comes during a sharp economic slowdown as the country's deaths from Covid-19 exceeds 100,000. Brazilian bonds sold off sharply over the week.
  • US corporate spreads tightened and there was active issuance with new offers from Apple, AES Panama, Ball Corp, Windstream, CVS and Comcast. Notably, US-based aluminium can maker Ball Corporation secured the lowest-ever borrowing costs for a US junk-rated company. It raised $1.3 billion via a 10-year bond issue, paying an annual coupon of 2.875%. The US high yield market has recovered strongly after its sharp sell-off in March and held on to most of those gains, as investors seek income. 

Chart of the Week: Search for income buoys US high yield despite COVID-19 figures

Chart of the week: Search for income buoys US high yield despite COVID-19 figures

Source: Bloomberg. Data as at 14 August 2020.

Bloomberg statistics 14 august 2020

Source: Bloomberg, 14 August 2020. Prices close of business 13 August 2020.

Economic calendar

16 August: Japan second-quarter GDP
17 August: Japan industrial production (June)
18 August: RBA meeting minutes; Japanese trade figures (July) 
19 August: UK, eurozone and Canada consumer price inflation (July); FOMC meeting minutes 
20 August: US weekly initial jobless claims
21 August: US, UK and eurozone Markit PMIs (August); Canada retail sales (June)

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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