Weekly fixed income review

Week to 7 August 2020

  • Benchmark US Treasury yield tumbles. The yield on the 10-year Treasury bond fell to 0.54% over the week against a backdrop of bad and uncertain news; Covid-19 infection rates in the US remain at high levels and both sides of Congress reached a stalemate over fiscal relief, after unemployment benefits expired at the end of July. The gold price also touched a new all-time high.
  • The Bank of England keeps rates at 0.1%. Policymakers maintained asset purchases of £745bn, while keeping the benchmark rate unchanged on 6 August. The bank’s governor, Andrew Bailey, also poured cold water on the idea of negative rates, saying “at the moment, we don’t plan to use them”. The 10-year gilt yield moved as low as 0.07% over the week before recovering, ending the week largely unchanged.
  • Companies benefit from low borrowing costs. Alphabet raised $10bn by issuing bonds across various maturities, securing a coupon of 1.1% on its 10-year paper. Airline company JetBlue also issued over the week. Low borrowing costs are enticing companies to credit markets – some are even rescheduling issuance plans to take advantage.
  • Global credit spreads broadly tightened over the week. In the US, the chase for yield drove demand outweighing the delayed stimulus bill. In Europe, activity was light as the European primary market is closed, due to the earnings season and summer period.
  • Argentina and Ecuador settle with creditors. In emerging markets, Argentina finally agreed the high-level terms of its $65bn debt restructuring, having agreed to make some payments earlier than expected. The agreement followed months of negotiations with creditors, after Argentina defaulted in May. Ecuador, meanwhile, has agreed a $17.4bn restructuring, which entails creditors accepting a write-off of 9%. The deal will give Ecuador a break from capital repayments until 2026.

Chart of the Week: US spreads (%) continued to tighten

Chart of the week

Source: Bloomberg as at 7 August 2020.

bloomberg stataistics 7 august 2020

Source: Bloomberg, as at 7 August 2020. Prices close of business August 6, 2020.

Economic calendar

10 August: China’s inflation rate (year on year, July)
11 August: Germany’s ZEW economic sentiment index
12 August: UK GDP, Q2, quarter on quarter; US core inflation rate
13 August: US initial jobless claims
14 August: Euro area growth rate, quarter on quarter; US retail sales (July)

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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