Weekly fixed income review

Week to 18 September 2020

  • The US Federal Reserve (Fed) projects no change to its policy until late 2023. The Fed said it is committed to keeping the target range for the federal funds rate at 0-0.25% until “labour market conditions have reached levels consistent with the Committee's assessment of maximum employment”. In data released by the Fed, the projections of its committee members foresee 'maximum employment' occurring in 2023. The Fed reiterated it would be content to see inflation above its long-term target of 2% for a sustained period before raising interest rates. It also revised its economic outlook, with its forecast for this year’s GDP raised from a contraction of 6.5% to one of just 3.7%. However, at the same time, it slightly lowered its forecasts beyond 2020. The 10-year Treasury yield fell on the news but was slightly higher over the week.
  • US retail sales weakened in August. Although the figure for August rose 0.6% over the month, this continued a weakening trend in the growth rate evident since the marked rebound in retail sales in May. With unemployment claims rising, this led to calls from several observers, including Fed chairman Jerome Powell, for increased fiscal spending from the US government. Corporate spreads tightened 2bp to 128bp as equity volatility settled down. We are seeing a surge in tender and exchange, which is reducing supply of short-dated paper and steepening the credit curve. New issuance was again around $50 billion, though deals were generally well received.
  • Economic sentiment in the eurozone rose substantially in September. The ZEW Economic Sentiment Index rose to a 16-year high, reflecting rising optimism around the trend in economic growth. This follows the loosening of Covid-19-related restrictions and comes despite the recent pickup in new coronavirus cases. Bond yields in the eurozone were largely unchanged over the week.
  • The Bank of England discussed the implementation of negative interest rates at its policy meeting on Thursday. The minutes of the Monetary Policy Committee meeting revealed that there had been an active discussion around negative interest rates and their likely impact on the economy. Gilt yields and sterling both fell as a result. Nevertheless, the central bank kept interest rates and the scale of its monthly bond-purchasing scheme unchanged. Meantime, consumer inflation fell to just 0.2% year-on-year in August, the lowest rate since late 2015 but heavily influenced by the ‘eat-out-to-help-out’ scheme, as well as a VAT cut for the hospitality sector. However, core inflation was higher, at 0.9% year-on-year, ahead of expectations.
  • Foreign inflows into Asian bond markets slowed in August. This was the third successive month that net flows into Asian bonds had slowed and reflects investors’ concerns around economic growth in the region, as well as the ongoing trade issues between China and the US and their impact on the wider Asian region. According to figures from local banks and bond market associations, net inflows fell from nearly $4bn in July to less than $0.5bn in August. Government bond yields in China, South Korea and Thailand all rose towards the end of the week.
  • The World Bank has put more pressure on creditors to offer debt relief for emerging countries. The World Bank’s president stated this week that he wanted to see greater debt forgiveness from large commercial creditors to emerging economies, as debt servicing threatens to overwhelm certain countries. The urgency of this comes as COVID-19 causes national debts to rise substantially across the globe.

Chart of the Week: The Fed’s forecast of US economic recovery

Chart of the Week: The Fed’s forecast of US economic recovery

Source: Federal Reserve. Data as at 16 September 2020.

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 128bp -3
Bloomberg Barclays Euro Corporate Index 114bp -1
Bloomberg Barclays Sterling Non Gilts Index 125bp -1
Bloomberg Barclays US Corporate High Yield Index 488bp -8
Bloomberg Barclays Pan-European High Yield Index 420bp -3
Bond yields (10yr)
USA 0.69% +2
Germany -0.49% -1
Japan 0.02% -1
UK 0.19% 0
EquitiesWeek-to-date change
S&P 500 3,357 +0.5%
DJ Euro Stoxx 50 3,317 0%
FTSE 100 6,050 +0.3%
DAX 13,208 0%
Nikkei 225 23,319 -0.4%
Currencies
EUR/USD 1.18 0%
JPY/USD 104.74 +1.4%
GBP/USD 1.30 +1.4%
Commodities
Brent Crude ($ per barrel) 43.30 +8.7%
WTI Crude ($ per barrel) 40.97 +9.8%
Gold ($ per ounce) 1,944.44 +0.2%

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

Economic calendar

22 September: US Redbook Index, UK CBI Industrial Trends survey
23 September: US, UK, eurozone and Japan preliminary PMIs for September
24 September: US initial jobless claims
25 September: US durable goods orders, eurozone Consumer Confidence Index

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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