Weekly fixed income review

Week to 20 November 2020

  • The US Federal Reserve (Fed) recommitted to supportive monetary policy. In an interview during the week, the Fed’s vice-chairman Richard Clarida stated that the central bank was “committed to using all of our available tools”. This provided some comfort to markets that have recently been unsettled by the continual delay to the expected announcement of further support from the Fed. Clarida went on to mention that “large-scale asset purchases” were very much part of the Fed’s weaponry. This was picked up by some commentators as meaning that the Fed was likely to maintain, or potentially increase, its bond-purchasing programme, currently set at $80bn per month. The 10-year Treasury yield declined over the week.

  • UK consumer inflation increased further in October. The inflation rate rose by 0.7% on an annual basis, having previously by 0.5% in September and 0.2% in August. Clothing prices recovered, while the prices of some food items and second-hand cars also rose. The inflation rate remains a long way below the Bank of England’s 2% medium-term target and expectations are that inflation will likely remain subdued for the foreseeable future. Annual core inflation rose from 1.3% in September to 1.5% in October. UK gilt yields generally softened a little over the week.

  • In the eurozone, the spread between 10-year Italian BTP and German Bund yields shrank further. Italian government bond prices continued to rally through much of the week, largely due to market expectations that the European Central Bank will likely provide further stimulus shortly through increased bond purchases and cheap loans to commercial banks; this would provide support for highly indebted nations such as Italy. This rally in bond prices saw the spread between Italian and German government bond yields fall below 1.2%, the lowest level since early 2018. Greek 10-year government bond prices were also supported by the growing likelihood of further central bank stimulus, with the 10-year yield falling below 0.65%, its lowest-ever level.

  • Japanese GDP rebounded by 5% in the third quarter. After three consecutive quarters of decline, GDP in Japan rose by 5% on a quarterly basis, and by 21.4% on an annualised one, in the third quarter of this year. Private consumption was the key driver of the rebound while private capital expenditure contracted at a softer pace. 10-year JGB yields fell over the week.

  • Several corporate bond issues were cancelled in China, adding to nervousness in the local bond market. A number of planned new corporate bond issues were shelved this week owing to defaults from various state-owned enterprises (SOEs). This followed news that that technology company Tsinghua Unigroup had missed a bond payment on a CNY1.3bn issue. Last week, Yongcheng Coal & Electricity defaulted on CNY1.0bn of debts, and this followed other high-profile SOE defaults over recent weeks. It has called into question whether certain SOEs are safe investments and whether either the local or national government will stand behind them and guarantee their debt.


Chart of the Week: 10-year UK gilt yield year-to-date (%)

Chart of the Week: 10yr German Bund yield over 12 months

Source: Bloomberg. Data as at 20 November 2020. 

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 109bp -5
Bloomberg Barclays Euro Corporate Index 96bp -3
Bloomberg Barclays Sterling Non Gilts Index 107bp -4
Bloomberg Barclays US Corporate High Yield Index 422bp -13
Bloomberg Barclays Pan-European High Yield Index 379bp -14
Bond yields (10yr)
USA 0.83% -7
Germany -0.57% -2
Japan 0.02% -1
UK 0.32% -2
EquitiesWeek-to-date change
S&P 500 3,582 -0.1%
DJ Euro Stoxx 50 3,452 0.6%
FTSE 100 6,334 0.3%
DAX 13,086 0.1%
Nikkei 225 25,634 1.0%
Currencies
EUR/USD 1.19 0.3%
JPY/USD 103.74 0.9%
GBP/USD 1.33 0.5%
Commodities
Brent Crude ($ per barrel) 44.20 +3.3%
WTI Crude ($ per barrel) 41.74 +4.0%
Gold ($ per ounce) 1,866.54 -1.2%

Source: Bloomberg, 20 November 2020. Prices close of business 19 November 2020.

Economic calendar

23 November: US, UK and eurozone PMI data
24 November: US consumer confidence index
25 November: US durable goods orders, US jobless claims,
26 November: Japan leading economic indicators, Japan CPI
27 November: Eurozone consumer confidence index, UK housing prices

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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