Weekly fixed income review

Market review

Week to 17 May 2019

US Treasury yields fell across the board mid-week and two-year yields hit a 15-month low of 2.14% following the release of weak retail sales and industrial output data. The unexpected decline in April’s retail sales was driven by a decline in motor vehicle purchases. Industrial production fell 0.5% representing the third decline in production this year. Following these releases, the Atlanta Fed revised down its 2Q GDP growth estimate to 1.1% from 1.6% annualised. China reduced its long-dated Treasury holdings by the largest amount in over 2 years in March with net sales amounting to US$20.45bn. This compares with US$1.08bn net purchases in February. While these sales are most likely an exercise in currency reserve management rather an active diversification, it comes amid an escalating of trade tensions between the US and China and prompted speculation that the reduction was some form of potential retaliatory measure. Treasury yields retraced higher later in the week as data releases turned positive – homebuilding increased more-than-expected in April, weekly jobless claims fell and the Philadelphia Fed’s business conditions index gained in May.

In Europe the 5s/30s EUR curve flattened about 4bp over the week. European rates markets were largely risk-off driven by deteriorating US-China trade discussions and political uncertainty in Italy. Investors were also wary of the threat of US tariffs on EU auto exports; although concerns were assuaged later in the week after headlines suggested that President Trump would delay any tariff decision by up to six months. Italian spreads have come under pressure on rising tensions between the leaders of Lega Nord and the Five Star Movement, Matteo Salvani and Luigi Di Maio, ahead of the forthcoming European parliamentary elections. Sentiment also deteriorated following a quote from Salvani that “Italy could break EU fiscal limits”. Beyond the supportive macro and geopolitical environment for European duration, Japanese investor inflows have also helped cap European government bond yields. Recent Japanese investor sovereign purchase data details that Japanese investors bought EUR25bn of French bonds – a large purchase in historical terms and represents a material jump in Japan’s holdings of outstanding of French bonds.

US credit markets ongoing negative trade headlines pushed spreads 4bp wider to 118bp, although there has been some recovery following the headlines that auto tariffs will be pushed out the next 6 months. In emerging markets, the Mexican peso declined 0.4% on Thursday after the central bank left borrowing costs unchanged at 8.25%. While the central bank has stated its belief that the recent pickup in inflation is transitory, its focus on wage and cost pressures leaves limited scope for rate cuts over the remainder of the year. Brazilian assets weakened after the release of bearish economic forecasts and concerns over the government’s ability to get its flagship pension reform through Congress. The Brazilian real has now slumped to its lowest level since October.

Figure 1: 10-year Italy-Germany yield spreads

10-year Italy-Germany yield spreads 17 May 2019

Source: Bloomberg. Data as at 17 May 2019

Bloomberg table 17 May 2019

Source: Bloomberg, 17 May 2019

Economic calendar

20 May: Japan Housing Loans
21 May: Eurozone OECD economic outlook
22 May: UK CPI
23 May: Japan CPI
24 May: US durable goods orders

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.

*Please read important information about Insight's data collection policies HERE before sharing your personal information with us on email.