Weekly fixed income review

Week to 16 October 2020

  • US consumer inflation rose to 1.4% on an annual basis in September. This marked the highest growth rate in the series since March and was also the fourth successive month of acceleration in the inflation rate since it troughed in May at 0.1%. However, US government bond yields fell across the curve over the week, influenced by the likely delay in the announcement of the proposed government stimulus package until after November’s presidential election.

  • US corporate spreads tightened over the week. They fell 2bp to 126bp owing to very strong demand from Asian investors, particularly in Taiwan, over the holiday-shortened week. Bank earnings were largely better than expected, and industrials will begin reporting in earnest next week. There was minimal new issue activity given earnings blackouts, although both Pemex and New York Life Insurance issued.

  • Eurozone government bond yields fell in unison across the region. Boththe 10-year German and French government bond yields fell to their lowest levels in over six months, while the Greek and Italian 10-year bond yields set new all-time lows before recovering modestly. The collective fall reflects investors’ concerns around the economic outlook for the eurozone in the face of a second wave of COVID-19, and the current lack of response from the authorities in terms of providing more stimulus. Additionally, October’s eurozone ZEW Economic Sentiment Indicator fell to its lowest level since May, tumbling from 73.9 to 52.3, reflecting waning confidence towards the bloc’s economy.

  • The Bank of England sounded out banks on the prospect of negative interest rates. The central bank conferred with banks over their readiness to cope with negative interest rates (in a sign that they are moving ever closer), setting a deadline of 12 November for a formal response. At the same time, there are growing expectations that the Bank will raise the size of its monthly bond-purchasing programme, currently set at £745bn.

  • UK unemployment rose to its highest level since May 2017. Unemployment rose to 4.5% in the three months to the end of August, a significant pickup from the previous reading of 4.1% in the three months to July. With the chancellor’s furlough scheme due to finish at the end of the month, being replaced by the less generous job support scheme, unemployment is widely expected to rise much further from current levels. UK government bond yields fell, with that on the 10-year gilt falling to almost 0.15%, the lowest level month to date.

  • China’s first ever direct government bond auction to US investors attracted record demand. The Chinese government issued a $6bn government bond directly to US investors during the week. The issue was more than four times covered, attracting $27bn of orders, as investors looked to lock into the higher relative yields on offer across a range of maturities.

Chart of the Week: Italian 10-year bond yields

Chart of the Week: Italian 10-year bond yields

Source: Bloomberg. Data as at 16 October 2020.

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 126bp -2
Bloomberg Barclays Euro Corporate Index 111bp -1
Bloomberg Barclays Sterling Non Gilts Index 121bp -1
Bloomberg Barclays US Corporate High Yield Index 465bp -9
Bloomberg Barclays Pan-European High Yield Index 430bp 0
Bond yields (10yr)
USA 0.73% -6
Germany -0.58% -6
Japan 0.03% -1
UK 0.22% -7
EquitiesWeek-to-date change
S&P 500 3,489 +1.2%
DJ Euro Stoxx 50 3,273 +0.5%
FTSE 100 5,935 -0.7%
DAX 13,028 -0.1%
Nikkei 225 23,627 -0.1%
EUR/USD 1.17 -0.1%
JPY/USD 105.17 +0.8%
GBP/USD 1.30 +0.6%
Brent Crude ($ per barrel) 43.32 0.0%
WTI Crude ($ per barrel) 41.04 -0.4%
Gold ($ per ounce) 1,901.52 +0.4%

Source: Bloomberg, 16 October 2020. Prices close of business 15 October 2020.

Economic calendar

October 19: China GDP
October 20: US housing starts, eurozone PPI
October 21: UK CPI and PPI
October 22: Eurozone consumer confidence index, US initial jobless claims
October 23: PMI data for US, UK, Japan and eurozone, UK retail sales

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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