Weekly fixed income review

Week to 25 September 2020

  • Following the US Federal Reserve’s downward revision to economic forecasts last week, Chairman Jerome Powell called for greater fiscal spending. He stated, at Congress’s Financial Services Committee, that the economy needed further fiscal packages in order to help both businesses and individuals, especially struggling smaller businesses and low-income households. In a blunt assessment of current fiscal spending, he emphasised that more should be done, and that both monetary and fiscal policy should be working in tandem to boost the economy. Both short and long-term US Treasury yields rose towards the end of the week.
  • Selling pressure in US high yield bonds rose dramatically over the week. US high yield experienced the highest net outflows since March, reflecting concern around the pace of economic recovery in the US. Net selling of junk bonds amounted to nearly $5bn, based on figures from EPFR Global, causing the average yield on US junk bonds to rise to over 5.8%.
  • Bank of England (BoE) governor Andrew Bailey ruled out negative interest rates in the near-future. Despite widespread speculation that the BoE was close to pulling the trigger on negative interest rates, Andrew Bailey suggested, in a speech to the British Chambers of Commerce, that while the BoE was looking at the practicalities around such a move, it had ruled out any imminent move towards negative interest rates. At the same time, Bailey warned that the economy would face a very tough final quarter of the year as coronavirus restrictions are reimposed.
  • The European Central Bank (ECB) announced that it would be reviewing its current measures employed to support the economy. The review is likely to take place at the ECB’s council meeting next month and will focus particularly on the current monthly bond-purchasing scheme, and whether to extend it or begin to gently reduce the level of purchases. This review had been expected following the increase in the Pandemic Emergency Purchase Programme budget, last June, to its current level of €1.35trn. Additionally, the ECB is increasingly calling for the EU’s €750bn Recovery Fund to be made permanent.
  • Eurozone government bond yields fell in aggregate as economic sentiment weakened. Italian 10-year BTP yields fell to levels not seen since last September, while the 30-year BTP yield fell to a record low of 1.75%, as worries mounted about the fragile state of the economy in Europe, especially as coronavirus cases mount. The rally in Italian BTP prices also partly reflected the results from regional elections that witnessed a disappointment for the ruling League party, and hence, less likelihood of new and divisive national elections. Spreads between Italian BTPs and German Bunds narrowed even as German and other eurozone countries’ government bond yields fell.
  • The Chinese government announced that it would reduce restrictions on foreign bond investment. The People’s Bank of China stated, in draft guidelines, that it would ease some of the red tape that exists preventing overseas investors from investing in Chinese bonds. At the same time, a report from Morgan Stanley showed that the Chinese government bond market was very close to being included in the FTSE World Government Bond Index.

Chart of the Week: German/Italian 10-year government bond yield spreads

Chart of the Week: German/Italian 10-year government bond yield spreads

Source: Bloomberg. Data as at 25 September 2020.

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 132bp +4
Bloomberg Barclays Euro Corporate Index 117bp +4
Bloomberg Barclays Sterling Non Gilts Index 126bp +2
Bloomberg Barclays US Corporate High Yield Index 519bp +29
Bloomberg Barclays Pan-European High Yield Index 442bp +22
Bond yields (10yr)
USA 0.67% -2
Germany -0.50% -2
Japan 0.01% 0
UK 0.22% +4
EquitiesWeek-to-date change
S&P 500 3,255 -1.9%
DJ Euro Stoxx 50 3,160 -3.8%
FTSE 100 5,823 -3.1%
DAX 12,607 -3.9%
Nikkei 225 23,088 -1.2%
Currencies
EUR/USD 1.17 -1.5%
JPY/USD 105.43 -0.8%
GBP/USD 1.27 -1.4%
Commodities
Brent Crude ($ per barrel) 41.74 -3.3%
WTI Crude ($ per barrel) 40.02 -2.7%
Gold ($ per ounce) 1,872.15 -4.0%

Source: Bloomberg, 25 September 2020. Prices close of business 24 September 2020.

Economic calendar

28 September: Japan leading economic indicator
29 September: Eurozone CPI, US consumer confidence index
30 September: US GDP (Q2), UK GDP (Q2), Japan Tankan survey
1 October: Eurozone industrial production, US initial jobless claims
2 October: US non-farm payrolls, US factory orders

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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