Weekly fixed income review

Week to 23 October 2020

  • There were hopes of fresh US fiscal stimulus. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have apparently made progress in talks about a potential $2trn package, although an agreement seems unlikely before the election. The yield on 10-year US Treasuries rose from 0.75% to 0.86% over the week, the highest level since the start of June. Expectations of an economic recovery, further debt issuance and a convincing Democratic win have combined to push bond yields higher.

  • The EU’s first issue of coronavirus-related bonds saw huge demand. Investors, who were attracted by the instruments’ relatively high (but still negative) yields compared with those on German or French bonds, placed bids for more than €230bn, far exceeding the €17bn of bonds on offer. The bonds are being used to partly fund the EU’s €100bn SURE programme (which will provide loans to member states to help them keep workers in employment during the pandemic). Brussels is expected to issue as much as €200bn in debt next year to fund its recently announced €750bn coronavirus recovery package. The yield on 10-year German Bunds rose from -0.63% to -0.57% over the week.

  • The UK government restarted negotiations with the EU over a transitional Brexit trade agreement. After a period in which apparently no progress had been made in talks between the two sides, hopes remain that a compromise will be reached. However, if a deal is finally agreed, it is now likely to be much less wide-ranging than initially expected, given the limited time left to negotiate. The yield on 10-year UK gilts rose from 0.18% to 0.28% over the week while sterling appreciated, moving through 1.30 against the US dollar (also helped by Dave Ramsden, the Bank of England’s deputy governor, saying now was not the right time for negative interest rates in the UK).

  • The UK’s annual inflation rate edged up to 0.5% in September. This was as expected and a slight increase from the near five-year low figure of 0.2% in August. The largest upward contributions were from recreation & culture, transport, and restaurants & hotels (after the end of the government’s ‘Eat Out to Help Out’ scheme). Annual core inflation rose from 0.9% in August to 1.3% in September, again as expected. However, inflation is still well below the Bank of England’s 2% target.

  • China’s third-quarter GDP expanded 4.9% year-on-year. This was less than expected but compared with a rate of 3.2% in the second quarter as economic activity continued to recover from the COVID-19 shock. After a state-backed industrial recovery, the expansion is now extending to consumption: in September, retail sales rose 3.3% year-on-year, their second consecutive monthly increase, as industrial production grew 6.9% year-on-year (the most since December 2019). The yuan is now approaching 6.6 per US dollar, its strongest level since July 2018, supported by firmer guidance from the People’s Bank of China and the recent improvement in domestic economic data.

Chart of the Week: 10-year US Treasury yields YTD (%)

Chart of the Week: 10-year US Treasury yields YTD (%)

Source: Bloomberg. Data as at 23 October 2020.

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 123bp -2
Bloomberg Barclays Euro Corporate Index 111bp -2
Bloomberg Barclays Sterling Non Gilts Index 119bp -4
Bloomberg Barclays US Corporate High Yield Index 469bp -2
Bloomberg Barclays Pan-European High Yield Index 440bp -5
Bond yields (10yr)
USA 0.86% +11
Germany -0.57% +6
Japan 0.04% +1
UK 0.28% +10
EquitiesWeek-to-date change
S&P 500 3,453 -0.9%
DJ Euro Stoxx 50 3,171 -2.3%
FTSE 100 5,786 -2.3%
DAX 12,543 -2.8%
Nikkei 225 23,474 0.3%
EUR/USD 1.18 0.9%
JPY/USD 104.86 0.5%
GBP/USD 1.31 1.3%
Brent Crude ($ per barrel) 42.46 -1.1%
WTI Crude ($ per barrel) 40.64 -0.6%
Gold ($ per ounce) 1,904.11 +0.3%

Source: Bloomberg, 23 October 2020. Prices close of business 22 October 2020.

Economic calendar

October 26: Australia trade balance, Germany IFO business sentiment index
October 27: US durable goods orders, consumer confidence and home prices; ECB bank lending survey
October 28: Australia CPI, Bank of Canada interest rate decision
October 29: ECB and Bank of Japan interest rate decisions, US Q3 GDP and weekly jobless claims
October 30: Euro area CPI, unemployment and Q3 GDP; US PCE inflation, personal income and spending; German 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.

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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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