Weekly fixed income review

Week to 8 January 2021

  • US government bond yields rose as results from Georgia showed the Democrats set to take control of the Senate. The 10-year Treasury yield rose to over 1.0%, its highest level since March, as it became apparent that president-elect Biden will be able to implement more of his policy agenda with an effective majority in both the Senate and the House of Representatives. This is likely to include raising public spending and tax hikes and is expected to drive inflation higher.
  • US firms raised record amounts of funding in the first few days of the year. Over $50bn of new debt has been issued in the first week of 2021 according to Refinitiv, a record amount at this stage in a new year. The issuance was led by Mexico, Home Depot, Kroger, MetLife, and General Motors; all took advantage of low interest rates and strong investor demand. Corporate spreads widened in part due to the new issue market opening and partly due to net selling from Asia. Markets were largely agnostic about the disruption at the Capitol, though the Democrat sweep in Georgia boosted high-beta names on fiscal stimulus hopes.
  • The UK increased support measures for its economy. UK Chancellor Rishi Sunak pledged a further £4.6bn of support for businesses directly affected by the national lockdown. A report from several economists suggested that government borrowing could now hit £450bn this financial year and the budget deficit could be 20% of GDP. This is much higher than the £394bn estimate recently made by the Office for Budget Responsibility and reflects the impact of the latest series of lockdowns on the UK economy. UK gilt yields rose over the week.
  • The Irish government issued debt at a negative yield.
  • It sold €5.5bn of 10-year bonds at an average yield of -0.257%. Demand exceeded €40bn. Italy also launched a new 15-year bond issue of €10bn and attracted record demand, with the issue over 10-times covered.
  • The World Bank warned of the likelihood of worldwide debt distress in 2021.
  • The president of the World Bank, David Malpass, warned of the dire situation facing many frontier and developing nations, caused by the COVID-19 crisis and the consequent indebtedness. He described the situation as flashing “red alert”. He encouraged creditors to consider ways “to adjust the debt burden” borne by poorer nations, singling out Chad, Zambia and Ecuador as in need of debt relief.

Chart of the Week: US Treasury 10-year yield rises sharply, UK gilts subdued

 

Source: Bloomberg. Data as at 8 January 2021. 

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 96bp 0
Bloomberg Barclays Euro Corporate Index 88bp -4
Bloomberg Barclays Sterling Non Gilts Index 94bp -3
Bloomberg Barclays US Corporate High Yield Index 350bp -10
Bloomberg Barclays Pan-European High Yield Index 333bp -14
Bond yields (10yr)
USA 1.08% +17
Germany -0.52% +5
Japan 0.04% +2
UK 0.28% +9
EquitiesWeek-to-date change
S&P 500 3,804 1.3%
DJ Euro Stoxx 50 3,622 2.0%
FTSE 100 6,857 6.1%
DAX 13,968 1.8%
Nikkei 225 27,490 0.2%
Currencies
EUR/USD 1.23 0.5%
JPY/USD 103.81 -0.6%
GBP/USD 1.36 -0.8%
Commodities
Brent Crude ($ per barrel) 54.38 +5.0%
WTI Crude ($ per barrel) 50.83 +4.8%
Gold ($ per ounce) 1,913.95 +0.8%

Source: Bloomberg, 8 January 2021. Prices close of business 7 January 2021.

Economic calendar

11 January: China CPI, Japan trade balance
12 January: UK retail sales
13 January: Eurozone industrial production, US CPI
14 January: US retail sales, US initial jobless claims
15 January: UK GDP, UK industrial production, US Michigan consumer sentiment index, China GDP

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.

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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.

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