Weekly fixed income review

Week to 21 August 2020

  • Demand for US fixed income was strong. The yield on 10-year Treasuries fell from its recent peak of over 0.70% to 0.65% in the face of continuing US-China tensions, rising cases of COVID-19 and relatively sluggish economic data. Minutes from the most recent Federal Open Markets Committee meeting revealed the US Federal Reserve mulled over an official cut to its 2020 economic forecast, suggesting more stimulus may be needed.
  • Record US corporate bond issuance. Corporate spreads widened 3bp to 131bp, as August supply levels reached an all-time high of over $120bn with companies taking advantage of low rates. Notable new issuance included Prudential, ICE, Lilly, Johnson & Johnson and Principal Financial. US investment-grade bond issuance year-to-date has now exceeded the levels for every year going back to 2009, rising above the recent high of 2017, as shown in the chart below.
  • US high-yield attracted strong demand in the second quarter. According to data from eVestment, there were net inflows of over $25bn, reversing a trend of net outflows seen over the past few years. High yield debt has also benefited from rising risk tolerance and the hunt for yield, as demonstrated by the strong rally seen in US C-rated (or below) debt over the past few weeks.
  • Japanese GDP figures were weak as expected with quarterly GDP falling for the third time in succession. Second-quarter GDP fell 7.8% over the quarter and by 27.8% on an annualised basis. The decline saw investors purchase Japanese government bonds, pushing yields on both 10- and 20-year maturities lower.
  • Italian government bond yields fell over the week. 10-year yields fell below 1%, leading to the spread over German bunds falling to approximately 140bp, the lowest since February.
  • The People‚Äôs Bank of China made a CNY700bn injection into its economy through one-year loans. This action reflected concern over the health of the recovery, with a renewed rise in coronavirus cases in certain regions, leading to the continued strategy of keeping monetary conditions as easy as possible.

Chart of the Week: US investment grade bond issuance has already hit a high for 2020 YTD

Chart of the Week: US investment grade bond issuance has already hit a high for 2020 YTD

Source: Bloomberg. Data as at 21 August 2020.

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 131bp +3
Bloomberg Barclays Euro Corporate Index 116bp +1
Bloomberg Barclays Sterling Non Gilts Index 125bp -1
Bloomberg Barclays US Corporate High Yield Index 502bp +4
Bloomberg Barclays Pan-European High Yield Index 450bp +6
Bond yields (10yr)
USA 0.65% -6
Germany -0.50% -8
Japan 0.04% -2
UK 0.23% -2
EquitiesWeek-to-date change
S&P 500 3,386 +0.4%
DJ Euro Stoxx 50 3,274 -0.9%
FTSE 100 6,013 -1.3%
DAX 12,830 -0.6%
Nikkei 225 22,881 -1.8%
Currencies
EUR/USD 1.19 +0.2%
JPY/USD 105.80 +0.8%
GBP/USD 1.32 +1.0%
Commodities
Brent Crude ($ per barrel) 44.90 +0.2%
WTI Crude ($ per barrel) 42.58 +1.4%
Gold ($ per ounce) 1,947.26 +0.1%


Source: Bloomberg, 21 August 2020. Prices close of business August 20, 2020.

Economic calendar

24 August: n/a
25 August: Eurozone second-quarter GDP, US consumer confidence
26 August: Japanese leading economic index, US durable goods orders
27 August: US jobless claims, eurozone industrial orders, Japanese CPI
28 August: Eurozone CPI, US CPI, US Michigan consumer sentiment 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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