Weekly fixed income review

Week to 2 October 2020

  • The European Central Bank (ECB) is considering targeting an average inflation rate At a conference in Frankfurt during the week, ECB President Christine Lagarde talked of the ECB following the US Federal Reserve’s lead in allowing monetary stimulus to remain loose until inflation recovers above the ECB’s targeted rate of “below, but close to, 2%”. This would potentially allow the inflation rate to spike above 2% for a sustained period, in an effort by the central bank to get inflation more sustainably entrenched in the economy. Her comments reignited speculation that the ECB might intensify its monetary stimulus efforts in the near-future.
  • In the US, there was increasing speculation of a further imminent boost to fiscal spending. Insiders suggested that the Democrats and Republicans had managed to agree on the details around a further package of measures to help businesses and individuals, and boost the economy, with a proposed budget in the region of $2trn. This would be a significant addition to the previous spending commitments already made by the US authorities, since the Covid-19 crisis began. Government bond yields jumped across the curve towards the end of the week, before falling back.
  • The UK’s second-quarter GDP decline was less than initially reported. The original figure of a quarterly fall of 20.4% in the UK economy, in the second quarter of 2020, was revised to a fall of 19.8%. This still marked the most severe contraction since records began in 1955 and was the worst figure reported among major developed economies. Gilts sold off over the week, with the 10-year yield spiking above 0.27%. At the same time, the Bank of England’s chief economist Andy Haldane stated that “contagious pessimism” was proving to be a hindrance to the UK’s recovery and warned commentators not to talk the economy down.
  • Japan’s Tankan survey showed an improvement. The much-followed indicator, which measures business managers’ outlook for their respective industries, recovered in the September quarter, for the first quarterly improvement in three years. The headline manufacturing diffusion index for large-sized companies rallied from -34 in July to -27, a strong improvement but still well below the zero level which marks the centre point between bullish and bearish expectations over business prospects. Japanese government bonds barely moved on the news.
  • The World Bank forecasts the lowest Asian growth rate for over 50 years. In a sombre assessment of the region’s growth prospects for 2020, the World Bank expects the Asian economy to expand by just 0.9%, which would mark the lowest growth rate since 1967. While the organisation expects China to grow, albeit by only 2%, the rest of the region is likely to contract by 3.5%.

Chart of the Week: Eurozone 5-Year inflation expectations (EUR 5-year inflation swap forward rate %)

Chart of the Week-Eurozone 5-Year inflation expectations (EUR 5-year inflation swap forward rate %

Source: Bloomberg. Data as at 2 October 2020.

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 135bp -5
Bloomberg Barclays Euro Corporate Index 117bp -4
Bloomberg Barclays Sterling Non Gilts Index 126bp -3
Bloomberg Barclays US Corporate High Yield Index 510bp -27
Bloomberg Barclays Pan-European High Yield Index 451bp -18
Bond yields (10yr)
USA 0.68% +2
Germany -0.54% -1
Japan 0.02% +1
UK 0.23% +5
EquitiesWeek-to-date change
S&P 500 3,381 +2.5%
DJ Euro Stoxx 50 3,194 +1.8%
FTSE 100 5,879 +0.6%
DAX 12,731 +2.1%
Nikkei 225 23,185 -0.1%
EUR/USD 1.17 +1.0%
JPY/USD 105.53 0.0%
GBP/USD 1.29 +1.1%
Brent Crude ($ per barrel) 40.93 -2.4%
WTI Crude ($ per barrel) 38.72 -3.8%
Gold ($ per ounce) 1906.01 +2.4%

Source: Bloomberg, 02 October 2020. Prices close of business 01 October 2020.

Economic calendar

5 October: Eurozone retail sales, US composite PMI
6 October: US trade balance, eurozone factory orders
7 October: Japan leading economic index, eurozone industrial production
8 October: US jobless claims
9 October: UK industrial production, UK trade balance

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.

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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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