Weekly fixed income review

Week to 6 November 2020

  • US bond yields dropped as the US presidential election produced an initially inconclusive result. After spiking at nearly 0.95%, the 10-year US Treasury yield dropped below 0.75% as it became clear that the election was much closer than had been expected; indeed, Donald Trump falsely claimed victory and threatened legal action if he lost. However, it appeared that the tide was gradually turning in Joe Biden’s favour as postal votes were counted, which prompted a rally in both equities and bonds, even though the final result may not be known until next week. 

  • The Bank of England raised its monthly bond-purchasing budget by £150bn. Following November’s meeting of the Monetary Policy Committee, the bank decided to raise the level of its bond-buying programme from £745bn to £895bn. The increase is aimed at supporting the economy, particularly, in the bank’s words, consumer spending, through the winter months and in the face of a likely double-dip recession. Interest rates were left unchanged.

  • UK borrowing is surging. New forecasts from the Centre for Economics and Business Research suggest that government borrowing will rise to £500bn this year as a result of the second lockdown and consequent extension of the furlough scheme, weak domestic and overseas demand, and dwindling tax receipts. UK bond yields fell sharply towards the end of the week, close to the recent lows of mid-October.

  • The outlook for economic growth in the eurozone was cut. The eurozone’s GDP forecast for the fourth quarter of this year has been reduced by two investment banks. Goldman Sachs cut its forecast of growth of 2.2% to a fall of 2.3% while Morgan Stanley’s cut was more modest. Both banks highlighted the negative impact of rising coronavirus cases and renewed lockdowns on economic activity. This implies, in their view, a more drawn out recovery going forward. Bond yields fell in most major eurozone bond markets, with the 10-year Italian bond yield falling to a new all-time low of 0.61%.

  • The Reserve Bank of Australia cut interest rates. The central bank reduced its key interest from 0.25% to 0.1% – a new all-time low. The bank stated that Interest rates are likely to remain there until inflation moves back into the 2-3% target range (the latest monthly inflation figure, for August, showed just 0.7% annual growth). At the same time, the bank announced that it would purchase up to A$100bn of government bonds, mostly in the 5-year and 10-year maturity range, over the next six months.

Chart of the Week: US 10-year Treasury yield (%)

Chart of the Week: US 10-year Treasury yield (%)

Source: Bloomberg. Data as at 06 November 2020. 

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 119bp -6
Bloomberg Barclays Euro Corporate Index 110bp -6
Bloomberg Barclays Sterling Non Gilts Index 118bp -3
Bloomberg Barclays US Corporate High Yield Index 436bp -73
Bloomberg Barclays Pan-European High Yield Index 430bp -41
Bond yields (10yr)
USA 0.76% -11
Germany -0.64% -1
Japan 0.02% -2
UK 0.23% -3
EquitiesWeek-to-date change
S&P 500 3,510 +7.4%
DJ Euro Stoxx 50 3,216 +8.7%
FTSE 100 5,906 +5.9%
DAX 12,568 +8.8%
Nikkei 225 24,105 +4.9%
Currencies
EUR/USD 1.18 +1.5%
JPY/USD 103.49 +1.1%
GBP/USD 1.31 +1.6%
Commodities
Brent Crude ($ per barrel) 40.93 +9.3%
WTI Crude ($ per barrel) 38.79 +8.4%
Gold ($ per ounce) 1,949.66 +3.8%

Source: Bloomberg, 06 November 2020. Prices close of business 05 November 2020.

Economic calendar

09 November: Japan leading economic indicators, eurozone trade balance
10 November: UK unemployment rate, eurozone industrial production
11 November: Japan machinery orders, Japan PPI
12 November: US jobless claims, US CPI, UK trade balance
13 November: Eurozone CPI, US PPI, US consumer sentiment index

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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