Weekly fixed income review

Week to 15 January 2021

  • Increased expectations of rising inflation drove US Treasury yields higher. The 10-year Treasury bond yield rose close to 1.2% during the week – the highest level since March – as long-term inflation expectations continued to grow. Consumer prices rose by 1.4% over the year in December, boosted by higher gasoline pricing. Several US Federal Reserve officials, including Vice Chair Richard Clarida, drew attention to the pent-up demand and spending potential of the private sector, once more people are fully vaccinated against coronavirus. Further, Joe Biden announced a new stimulus package, amounting to $1.9trn, as the US battles through the current COVID-19 crisis, in which new cases and death levels are still rising ominously. A $38bn issue of 10-year Treasuries was met with strong demand, leading to a fall in yields from mid-week.

  • In the UK, Bank of England Governor Andrew Bailey appeared more cautious on the introduction of negative interest rates despite the weaker short-term economic outlook. This followed a statement earlier in the week from a fellow central bank policymaker suggesting there was a clear requirement for negative interest rates. Bailey suggested that negative interest rates could have the unintended consequence of further pressuring bank margins. Both parties, however, seemed to agree that the short-term outlook for the UK economy is challenging, with Bailey describing the economy as facing a “very difficult period”, as the mutant strain of COVID-19 spreads before vaccinations have been widely rolled out. This sentiment was reiterated by Chancellor Rishi Sunak who stated that the economy was likely to “get worse before it gets better”. GDP fell 2.6% over the month in November, bringing to a halt six consecutive months of growth. After rising early in the week, UK gilt yields drifted lower but remained modestly higher week on week.

  • Moody’s warned on growing eurozone debt levels.The credit rating agency downgraded its rating on eurozone debt to negative. It stated that the highest risks were in Italy, Spain, Portugal and Cyprus – all of which have recently seen all-time low benchmark government bond yields – as the economic devastation resulting from COVID-19 has caused government debt levels to soar, especially in southern European countries. Despite this, Spain successfully issued €10bn of 10-year bonds during the week, at an average yield of approximately 0.5%, which attracted demand of more than €130bn – the largest ever-recorded order book for a eurozone government debt issue.

  • There was a surge in eurozone corporate debt issuance. Credit markets in the eurozone have been inundated with several new issues from companies increasingly eager to lock in the low level of rates currently available. Utility company Eon launched a new €600bn issue at a coupon of just 0.1%, while budget-airline Wizz Air launched its maiden issue of €500bn at just over 1%. The low available funding costs are a boon to companies while the demand for the new paper reflects investor confidence that the European Central Bank will continue to support the market through its bond-buying programme.

Chart of the Week: US Treasury 10-year yield (%) hits highest level since March

 Chart of the Week: US Treasury 10-year yield (%) hits highest level since March

Source: Bloomberg. Data as at 15 January 2021. 

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 93bp -2
Bloomberg Barclays Euro Corporate Index 90bp +3
Bloomberg Barclays Sterling Non Gilts Index 96bp +2
Bloomberg Barclays US Corporate High Yield Index 347bp -1
Bloomberg Barclays Pan-European High Yield Index 341bp +11
Bond yields (10yr)
USA 1.13% +1
Germany -0.55% -3
Japan 0.04% +1
UK 0.29% +0
EquitiesWeek-to-date change
S&P 500 3,796 -0.8%
DJ Euro Stoxx 50 3,641 -0.1%
FTSE 100 6,802 -1.0%
DAX 13,989 -0.4%
Nikkei 225 28,698 2.0%
Currencies
EUR/USD 1.22 -0.5%
JPY/USD 103.80 0.1%
GBP/USD 1.37 0.9%
Commodities
Brent Crude ($ per barrel) 56.42 +0.8%
WTI Crude ($ per barrel) 53.57 +2.5%
Gold ($ per ounce) 1,843.53 -0.1%

Source: Bloomberg, 15 January 2021. Prices close of business 14 January 2021.

Economic calendar

18 January: China Q4 GDP, Japan industrial production
19 January: Eurozone current account, eurozone economic sentiment survey
20 January: UK CPI, eurozone CPI, Japan trade balance
22 January: US initial jobless claims, US housing starts, Japan CPI
23 January: UK consumer confidence index, UK retail sales, US, eurozone and UK PMI

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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