Weekly fixed income review

Week to 25 October 2019

  • The European Central Bank (ECB) left rates unchanged on Thursday, marking President Mario Draghi’s final policy meeting at the central bank. Draghi stated that economic data for the eurozone has continued to moderate as international trade tensions have weakened manufacturing activity and business investment. The ECB’s previously announced new round of quantitative easing (monthly purchases of €20bn) is due to begin next week on 1 November
  • UK government bonds rallied during the week with the yield on the 10-year gilt moving 7bp lower, outperforming US 10-year Treasuries (+2bp) and 10-year German bunds (-1bp) amid ongoing Brexit uncertainty. Elsewhere, the yield on Greek 10-year debt continued its march lower, falling to a record low of 1.2%. (See chart below.) Investors expect Standard and Poor’s to upgrade the Greek nation’s credit rating on Friday.
  • European data remained subdued as the composite PMI reading for the region ticked up by only 0.1 to 50.2 for October. The German manufacturing PMI reading came in at 41.9, only marginally higher than September’s 41.7. However, French data was more promising as manufacturing and services both climbed to 50.5 and 52.9 respectively.
  • The UK government’s Brexit deal vote was delayed due to the passing of an amendment over the weekend that required all of the legislation to pass through Parliament, forcing Prime Minister Boris Johnson to request an extension from the EU. Then, on Tuesday MPs voted in favour of the prime minister’s deal but rejected his timetable to leave the EU on 31 October. At the time of writing, EU officials have agreed to an extension but have yet to decide on its duration while PM Johnson pushes for a December general election.
  • In credit markets, corporate spreads tightened as easing China trade tensions and Brexit worries helped buoy risk sentiment while low yields continued to drive investors’ reach for yield. Market participants also focused on earnings during the week, which have largely been coming in a bit better than consensus; we have not seen outsized reaction to any releases thus far. There was also minimal USD issuance with only a handful of deals from Fifth Third, Norfolk Southern, Wells Fargo, and CELARA. European issuance was similarly quiet with €25bn of issuance during the week.

Chart of the Week: The yield on 10-year Greek debt fell to an all-time low this week (%)

Chart of the Week The yield on 10-year Greek debt fell to an all-time low this week (%)

Source: Bloomberg. Data as at 25 October 2019.

Bloomberg statistics_25_Oct_2019

Source: Bloomberg. Data as at 25 October 2019.

Economic calendar

28 October: US Dallas manufacturing index
29 October: France consumer confidence, US pending home sales
30 October: US and France GDP, German unemployment and inflation, EU business confidence
31 October: EU inflation, German retail sales, US jobless claims
1 November: US unemployment, ISM manufacturing, and nonfarm payrolls

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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