Weekly fixed income review

Week to 15 November 2019

  • In the US, 10-year Treasury yields fell by c.11bp. Early in the week, President Trump indicated a deal with China could happen soon, before adding that tariffs would be “substantially” raised if a deal was not made. China’s Ministry of Commerce indicated yesterday that removing existing additional tariffs is an important condition for reaching a deal. On the data front, US retail sales increased by 0.3% in October, a slight beat on consensus of 0.2%.
  • In US credit, risk appetite remained broadly positive, even amid more mixed trade headlines. Issuance remained strong, with the fourth-largest deal in history, at $30bn, being brought by a US pharmaceutical. Easy Federal Reserve policy and a better economic backdrop seem to be helping to push spreads tighter into year-end.
  • Core European government bond yields fell, with 10-year bund yields decreasing by c.8bp. Germany surprised markets by avoiding a technical recession in Q3, with data showing +0.1% growth (versus -0.1% expected). Meanwhile, spreads widened on the periphery amid political uncertainty in Spain and Italy: 10-year Spanish and Italian spreads over bunds widened by c.14bp and c.17bp respectively. In Spain, the Spanish Socialist Workers’ party won the country’s fourth general election in as many years, but failed to secure a majority, leading the party to agree a preliminary coalition deal with anti-austerity party Unidas Podemos.
  • In European credit, the primary market was busy, with companies continuing to issue debt before the traditional seasonal slowdown in December. Peripheral issuers underperformed given the geopolitical backdrop.
  • Campaigning for the UK’s December general election began in earnest, with polls indicating a comfortable majority for the Conservative Party. Brexit Party leader Nigel Farage said his party would not stand in seats won by Conservatives in the last election. Yields on 10-year gilts fell by around 6bp.
  • In emerging markets, central banks in Egypt and Mexico followed the trend to ease monetary policy and cut rates. Meanwhile, ongoing demonstrations in Hong Kong turned increasingly violent. Economic data from China came in weaker than expected, with aggregate financing in October totalling CNY619bn yuan (versus CNY950bn expected).

 Chart of the Week: Germany avoids a technical recession in Q3, with +0.1% GDP reading

Chart of the Week- Germany avoids a technical recession in Q3, with +0.1% GDP reading

Source: Bloomberg. Data as at 15 November 2019.

Chart of the Week- Germany avoids a technical recession in Q3, with +0.1% GDP reading

Source: Bloomberg, 15 November 2019

Economic calendar

  • Tuesday: US October building permits, housing starts; euro area September construction output; Italy September industrial sales, industrial orders; Japan October trade balance
  • Wednesday: US weekly MBA mortgage applications; Germany October PPI
  • Thursday: US weekly initial jobless claims, October leading index, existing home sales; euro area advance November consumer confidence; France November business confidence, manufacturing confidence; UK October public sector net borrowing; Japan October nationwide CPI
  • Friday: Preliminary November manufacturing, services and composite PMIs in US, euro area, France, Germany, Japan; Germany final Q3 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. 

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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