Weekly fixed income review

Week to 4 September 2020

  • US Treasury yields fell across the curve. Yields moved lower as concerns about the sustainability of the equity market rally increased, leading investors to search for safe haven trades. These fears were a result of increasing market volatility and a sharp decline in technology stocks on Thursday. It was reported that Apple recorded the largest one-day loss in market value for a US listed company in history at $179.92bn. Hopes of further fiscal stimulus measures which would result in a significant increase in supply was not sufficient to deter investors from the Treasury market.
  • Inflation in the eurozone fell to -0.2% in August. The average figure for all 19 eurozone countries fell below zero (on an annual basis) for the first time in over four years, and was worse than expected. Core inflation fell to 0.4% too, the lowest level ever recorded. Government bond yields fell across the eurozone, as fixed income markets speculated on the likelihood of further monetary stimulus from the European Central Bank to fight deflation. The Central Bank also signalled its concern about the sustained strength of the euro, leading to a fall in the currency on the back of this news.
  • US corporate bond issuance reached a new all-time high during the week. New issues drove total issuance to $1.919trn year to date, higher than 2017’s previous annual record of $1.916trn, according to figures from Refinitiv. Companies are making the most of the prevailing low interest-rate environment to raise debt. Potentially, there could be $140bn of total issuance in September. Despite the new supply, corporate spreads tightened 4bp to 126bp. Demand for investment grade paper continues to be strong as investors search for incremental yield given ultra-low nominal interest rates. The real yields on several short-dated (1-3 years) US Investment grade bonds turned negative.
  • There was strong demand for Germany’s first-ever green bond issue. The €6bn 10-year government bond issue was nearly six times oversubscribed. This continues a recent trend of government green bond issues across Europe, with Sweden also issuing a green bond this week. Germany plans to issue up to €12bn in such bonds this year.

Chart of the Week: Deflation occurred in the euro area for the first time in four years.

Chart of the Week: Deflation occurred in the euro area for the first time in four years.

Source: Eurostat. Data as at 04 September 2020.

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 128bp -2
Bloomberg Barclays Euro Corporate Index 114bp 0
Bloomberg Barclays Sterling Non Gilts Index 124bp +1
Bloomberg Barclays US Corporate High Yield Index 480bp +5
Bloomberg Barclays Pan-European High Yield Index 426bp -10
Bond yields (10yr)
USA 0.63% -9
Germany -0.49% -8
Japan 0.04% -2
UK 0.24% -7
EquitiesWeek-to-date change
S&P 500 3,455 -1.5%
DJ Euro Stoxx 50 3,304 -0.3%
FTSE 100 5,851 -1.9%
DAX 13,058 +0.2%
Nikkei 225 23,466 +2.5%
Currencies
EUR/USD 1.19 -0.4%
JPY/USD 106.19 -0.8%
GBP/USD 1.33 -0.5%
Commodities
Brent Crude ($ per barrel) 44.07 -2.2
WTI Crude ($ per barrel) 41.37 -3.7%
Gold ($ per ounce) 1,930.91 -1.7%

Source: Bloomberg, 04 September 2020. Prices close of business 03 September 2020.

Economic calendar

7 September: eurozone industrial production, UK retail sales, Japan leading economic index
8 September: eurozone trade balance, eurozone retail sales
9 September: Japan machinery orders
10 September: US jobless claims, US PPI
11 September: US CPI, eurozone CPI, UK trade balance

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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