Weekly fixed income review

Week to 30 October 2020

  • US Treasury yields decline as the Volatility Index (VIX) spikes higher. COVID-19 numbers in the US hit a record daily high of 91,000 cases on Thursday bringing fear to markets. The VIX, often referred to as the ‘fear index’, spiked to levels not seen for over four months as equity markets tumbled.  The presidential election and a lack of clarity over further fiscal stimulus was a further negative. The 10-year Treasury yield fell steadily over the week, from recent four-month highs, while the S&P 500 Index fell even more sharply, notching up a 4.5% loss. By contrast corporate spreads were more resilient widening only 2bp to 125bp. There was minimal new issue activity going into the election, with deals from Lenovo and Stanley Black & Decker.

  • German bond yields fall over new concerns on virus. The number of new COVID-19 cases in Germany has also risen substantially, leading to a decline in the German consumer confidence and investor sentiment indicators. The 10-year German Bund yield fell to -0.64%, its lowest level in over six months. Government bond yields also fell in other key European markets,such as France and Italy, as investors sought out safe-havens, with a marked shift from equities to bonds.

  • The European Central Bank kept interest rates unchanged but indicated that more stimulus was ready to be launched, potentially as soon as December. At the October policy meeting of the European Central Bank, President Christine Lagarde indicated that the bank was considering extra stimulus measures to boost growth and reignite inflation. Headline consumer inflation has now been negative for three consecutive months. In contrast, GDP growth for the third quarter expanded 12.7% from the previous period as lockdown restrictions were eased; however, their recent re-imposition is expected to cause a slowdown in the fourth quarter.In the UK, there were some tentative suggestions that Brexit negotiations were progressing, with European Commission President Ursula Von der Leyen stating that talks were making ‘good progress’.

  • Japanese life insurers return to buying domestic bonds.  A report from Reuters, based on interviews with major Japanese life insurers, has indicated a trend away from foreign currency-denominated debt into Japanese domestic debt. The cause is the fall in the relative yield gap between foreign and domestic debt yields, following a fall in yields in most overseas bond markets as Japanese bond yields have been relatively steady, especially at the long end of the yield curve.

Chart of the Week: S&P500 volatility (VIX) spikes due to second wave of virus

Chart of the Week: S&P500 volatility (VIX) spikes due to second wave of virus

Source: Bloomberg. The Chicago Board Options Exchange's CBOE Volatility Index (VIX). Data as at 30 October 2020. 

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 125bp +2
Bloomberg Barclays Euro Corporate Index 116bp +5
Bloomberg Barclays Sterling Non Gilts Index 120bp +2
Bloomberg Barclays US Corporate High Yield Index 507bp +39
Bloomberg Barclays Pan-European High Yield Index 481bp +43
Bond yields (10yr)
USA 0.82% -2
Germany -0.64% -6
Japan 0.03% -1
UK 0.22% -6
EquitiesWeek-to-date change
S&P 500 3,310 -4.5%
DJ Euro Stoxx 50 2,960 -7.5%
FTSE 100 5,582 -4.8%
DAX 11,598 -8.3%
Nikkei 225 23,332 -0.8%
Currencies
EUR/USD 1.17 -1.6%
JPY/USD 104.61 +0.1%
GBP/USD 1.29 -0.8%
Commodities
Brent Crude ($ per barrel) 37.65 -9.9%
WTI Crude ($ per barrel) 36.17 -9.2%
Gold ($ per ounce) 1,867.59 -1.8%

Source: Bloomberg, 30 October 2020. Prices close of business 29 October 2020.

Economic calendar

02 November: Manufacturing PMI data for US, UK, Japan and eurozone
03 November: US factory orders
04 November: Eurozone unemployment, non-manufacturing PMI data for US, UK and eurozone
05 November: Eurozone retail sales, US jobless claims
06 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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