Weekly fixed income review

Week to 4 December 2020

  • US inflation expectations rise. US inflation expectations have risen to their highest level in 18 months, as witnessed by the 10-year breakeven inflation rate which rose to 1.86% on Thursday. The move follows news of the imminent roll-out of COVID-19 vaccines and growing expectations of a return to normal for the US economy in 2021. The 10-year Treasury yield rose to 0.95%, while US corporate spreads tightened 7bp to 100bp due in part to light supply as well as vaccine hopes. Energy and vaccine beneficiaries (Airlines and hotels) have outperformed.

  • US Federal Reserve chairman Jerome Powell warns of uncertainty ahead. In an address to Congress, Powell stated that the economic outlook continues to be “extraordinarily uncertain” as the number of new coronavirus cases continues to rise in the US, and despite the recent good news on vaccines. This contrasted with the views emanating from the US Treasury, where Treasury Secretary Steven Mnuchin gave a more upbeat note on the economic outlook.

  • US senators propose $900bn stimulus. A group of US senators from both the Democratic and Republican parties have tried to break the stand-off between the sides regarding a new package of support measures for the economy. A $908bn package has been put forward, albeit some way short of the $2trn package discussed ahead of the US presidential election.

  • The OECD predicts a weak UK economic recovery in 2021. In the OECD's latest economic growth forecast it estimated a decline of 11.2% in UK growth for 2020, the weakest among the 37 nations it monitors, followed by a 4.2% recovery in 2021. The OECD pointed to several factors accounting for the UK’s weak relative performance: a slow response to the first wave of the coronavirus; a high weighting of the UK economy to consumer spending; and the disruption of leaving the EU, with or without a deal, at the end of the year. It suggested the UK economy will still be some 6.4% smaller than before the pandemic struck at the end of 2021, while most economies would have recovered their lost output. Gilt yields rose, however, supported by the positive news on the imminent distribution of COVID-19 vaccines.

  • European bank bonds continued to rally strongly over the week. Yields on European bank debt, as shown by the ICE euro banking index, dropped close to all-time lows and the spread over government debt yields fell to pre-COVID-19 levels. This reflected the general ‘risk-on’ rally in markets, the improving outlook for banks and the news that eurozone finance ministers had struck a deal to reform the European Stability Mechanism (ESM). The reform of the ESM is regarded as vital in providing the necessary funds to ailing commercial banks and other lenders; it will be in place once it has been ratified by respective parliaments within the eurozone

Chart of the Week: US 10-year break-even inflation rate soars

Source: Bloomberg. Data as at 4 December 2020. 

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 99bp -7
Bloomberg Barclays Euro Corporate Index 93bp 0
Bloomberg Barclays Sterling Non Gilts Index 101bp -1
Bloomberg Barclays US Corporate High Yield Index 385bp -25
Bloomberg Barclays Pan-European High Yield Index 345bp -16
Bond yields (10yr)
USA 0.91% +7
Germany -0.56% +3
Japan 0.03% -1
UK 0.32% +4
EquitiesWeek-to-date change
S&P 500 3,667 0.8%
DJ Euro Stoxx 50 3,517 -0.3%
FTSE 100 6,490 1.9%
DAX 13,253 -0.6%
Nikkei 225 26,809 0.6%
EUR/USD 1.21 1.5%
JPY/USD 103.84 0.2%
GBP/USD 1.35 1.0%
Brent Crude ($ per barrel) 48.71 +1.1%
WTI Crude ($ per barrel) 45.64 +0.2%
Gold ($ per ounce) 1,841.08 +3.0%

Source: Bloomberg, 4 December 2020. Prices close of business 3 December 2020.

Economic calendar

07 December: Japan leading economic index, China trade balance  
08 December: Eurozone economic sentiment index   
09 December: China CPI, US wholesale inventories
10 December: UK trade balance, UK industrial production, US CPI, US jobless claims
11 November: US PPI, US Michigan consumer sentiment index   

Important information

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