Weekly fixed income review

Week to 18 December 2020

  • The US Federal Reserve (Fed) retained its current monthly bond-purchasing programme. Minutes from the Fed’s Open Market Committee meeting indicated that the central bank would retain its current budget of $120bn of bond-purchasing, at least until there were greater signs of a sustainable economic recovery. The Fed also revised its GDP forecast for 2021 marginally higher, from 4.0% to 4.2%. Despite this, the US 10-year Treasury yield increased over the week, almost touching 0.95%, as optimism grew about the approval, and gradual distribution of, the COVID-19 vaccine across the US. There were also some encouraging signs of progress in Congress towards the much-awaited stimulus package which is expected to total approximately $900bn.

  • The UK’s unemployment rate continued to edge higher. Unemployment for the three months to October reached 4.9%, up from 4.8% in the previous three-month period. Although the rise in unemployment remains modest, with the jobs market supported by the furlough scheme, employment levels dropped by the most in a decade, with 280,000 less people in work compared to this time last year. Gilt yields, however, rose as investors were cheered by the rollout of the Covid-19 vaccine and the last-ditch efforts of the EU and the UK to come to a post-Brexit trade agreement. These factors also drove sterling to its highest level in over two years.

  • Bond yields in the eurozone moved higher on strong manufacturing data, Brexit talks and US stimulus plans. The preliminary reading of the eurozone manufacturing purchasing managers’ index for December showed a rebound to 55.5, the highest reading for over 30 months. The recovery was uneven, however. Both France and Germany enjoyed a marked recovery in orders and output but some smaller economies saw a decline. Many eurozone bond markets experienced a spike in yields late in the week, as Brexit talks went down to the wire and expectations grew that Congress would approve its stimulus plan.

  • Japan’s Tankan survey showed a marked improvement. The headline large company manufacturing diffusion index of the quarterly business survey, (otherwise known as the Tankan survey), rose to -10 in the fourth quarter of 2020, up from -27 in the third quarter and a seven-year low of -34 in the second quarter. The forecast for next quarter is of a further modest improvement to -8. Japanese government bond yields were largely unchanged over the week.

Chart of the Week: UK 10-year gilt yields


Source: Bloomberg. Data as at 18 December 2020. 

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 100bp -5
Bloomberg Barclays Euro Corporate Index 92bp -1
Bloomberg Barclays Sterling Non Gilts Index 99bp -1
Bloomberg Barclays US Corporate High Yield Index 378bp -6
Bloomberg Barclays Pan-European High Yield Index 344bp -10
Bond yields (10yr)
USA 0.93% +4
Germany -0.57% +7
Japan 0.01% -0
UK 0.29% +12
EquitiesWeek-to-date change
S&P 500 3,722 1.6%
DJ Euro Stoxx 50 3,561 2.2%
FTSE 100 6,551 0.1%
DAX 13,667 4.2%
Nikkei 225 26,807 0.6%
EUR/USD 1.23 1.3%
JPY/USD 103.11 0.9%
GBP/USD 1.36 2.7%
Brent Crude ($ per barrel) 51.50 +3.1%
WTI Crude ($ per barrel) 48.36 +3.8%
Gold ($ per ounce) 1,885.42 +2.5%

Source: Bloomberg, 18 December 2020. Prices close of business 17 December 2020.

Economic calendar

21 December: Eurozone consumer confidence 
22 December: UK current account, US home sales   
23 December: Japan leading indicators, US Michigan consumer sentiment index 
24 December: US durable goods orders, Japan CPI, Japan 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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