Weekly fixed income review

Week to 27 November 2020

  • 10-year Treasury yields rose over the week. The risk-on trade was in evidence as equity markets rose and bond markets fell, reflecting bullish sentiment towards the latest COVID-19 vaccine news. Further, Joe Biden announced that ex-Federal Reserve chairperson Janet Yellen would be his Treasury Secretary. Her prior record suggests she has a dovish stance towards monetary policy and favours more fiscal stimulus. In economic news, the US manufacturing purchasing managers’ index (PMI) for November showed a bounce to its highest level since September 2014, with output rising, driven by strong growth in new orders. However, initial jobless claims continued to rise for the second week in a row.

  • The eurozone services sector PMI dropped to a six-month low. Resulting from the renewed restrictions on social and business activity across Europe in the face of the second wave of the coronavirus, demand for services dropped significantly according to flash figures for November. The PMI fell to 41.3, below market expectations and significantly below the important 50.0 level (which separates expansion from contraction). It was also materially lower than October’s figure of 46.9.

  • UK Chancellor Rishi Sunak announced record borrowing for 2020. In his one-year spending review, Rishi Sunak stated that the UK was on target to borrow almost £400bn this year, with the budget deficit likely to rise to its highest level in peacetime. He forecast a fall in GDP of 11.3% in 2020 – the largest fall ever recorded – followed by a rise of 5.5% in 2021. Although no specific plan of action to tackle the high levels of gross debt or the deficit was mentioned, the chancellor had already announced a freeze in public sector wages. The UK government also announced that the Retail Price Index (RPI) will be brought into line with the Consumer Prices Index including owner occupiers’ housing costs (CPIH), which is typically lower than the RPI, from 2030. This is expected to reduce the future change in RPI from 2030 onwards by 1% per annum. This decision has significant implications for holders of long-dated index-linked gilts, most of which are aligned to RPI.

  • Emerging market debt rallies. Prices of emerging market bonds rose as inflows into the sector turned positive for the first time in eight months. According to data from EPFR, a subsidiary of Informa, the intelligence and research company, flows into the sector totalled $3.5bn in the week to 18 November – the fourth largest figure ever recorded. The growing confidence in the recently announced COVID-19 vaccines has prompted investors to search out riskier and higher yielding assets such as emerging market debt.

Chart of the Week: Eurozone services PMI

Chart of the Week: Eurozone services PMI

Source: Bloomberg. Data as at 27 November 2020. 

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 107bp -3
Bloomberg Barclays Euro Corporate Index 93bp -3
Bloomberg Barclays Sterling Non Gilts Index 102bp -5
Bloomberg Barclays US Corporate High Yield Index 409bp -13
Bloomberg Barclays Pan-European High Yield Index 362bp -16
Bond yields (10yr)
USA 0.88% +6
Germany -0.59% -1
Japan 0.03% +1
UK 0.28% -2
EquitiesWeek-to-date change
S&P 500 3,630 2.0%
DJ Euro Stoxx 50 3,511 1.2%
FTSE 100 6,363 0.2%
DAX 13,287 1.1%
Nikkei 225 26,537 4.0%
EUR/USD 1.19 0.5%
JPY/USD 104.26 -0.4%
GBP/USD 1.34 0.6%
Brent Crude ($ per barrel) 47.80 +6.3%
WTI Crude ($ per barrel) 45.71 +8.4%
Gold ($ per ounce) 1,815.80 -2.9%

Source: Bloomberg, 27 November 2020. Prices close of business 26 November 2020.

Economic calendar

30 November: Japan unemployment 
01 December: US ISM manufacturing survey, eurozone CPI, UK house prices  
02 December: Eurozone unemployment, eurozone PPI 
03 December: US initial jobless claims, eurozone retail sales 
04 November:US non-farm payrolls, US unemployment

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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