Weekly fixed income review

Week to 9 October 2020

  • Biden's large poll lead and proposed stimulus package boost US stocks and Treasury yields.Two polls in the past week have put Joe Biden over 10 percentage points clear of Donald Trump, which has eased fears of a disputed election result. Markets were also buoyed by Biden's proposed stimulus package of social security payments; estimates put the size of the stimulus at $1trn to $2trn. Against this backdrop, the US Treasury bond market sold off, with the 10-year Treasury yield rising to its highest level since late May, while the S&P 500 Index rose 2.9%. US credit spreads tightened 6bp to 128bp. Markets will begin to focus on earnings next week, with S&P 500 earnings expected to be down about 22% from last year.

  • The European Central Bank (ECB) considers boosting liquidity levels. In an interview during the week, ECB President Christine Lagarde suggested that flooding the financial system with liquidity was a more appropriate tonic for escaping deflation and boosting economic growth than further interest rate cuts. Although not ruling out further easing, Lagarde stated that her preference was to further increase the supply of liquidity.

  • Italian/German 10-year government bond yield spread tightens. The 10-year German bund yield climbed to -0.49% during the week, before falling back. However, Italian 10-year government yields fell to their lowest level of all time, of just over 0.72%, reducing the spread between German and Italian 10-year government bond yields to approximately 125bp, the tightest level since February.

  • UK GDP slows in August. GDP grew by 2.1% on a month-on-month basis, much lower than had been expected by economists. Most of the growth in August came from the hospitality sector which benefited from Chancellor Rishi Sunak’s program to subsidize eating out. Separately, Bank of England Governor Andrew Bailey warned that the economy was in danger of stalling and that the risks were “very much on the downside”. He called upon banks to inject available liquidity into the economy. UK bond yields, which had risen early in the week, fell towards the end of the period.

  • Japanese government bond yields rose across the curve. The 10-year Japanese government bond yield touched 0.04%, the highest level for a month, while longer-dated bond yields – such as those on 30 and 40-year instruments – rose to their highest levels since early July. Bank of Japan Governor Haruhiko Kuroda stated during the week that fiscal and monetary stimulus was having a positive effect on the Japanese economy. 

Chart of the Week: US 10-year Treasury yields reach four-month high (%)

Chart of the Week: US 10-year Treasury yields reach four-month high (%)

Source: Bloomberg. Data as at 9 October 2020.

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 128bp -6
Bloomberg Barclays Euro Corporate Index 112bp -5
Bloomberg Barclays Sterling Non Gilts Index 122bp -4
Bloomberg Barclays US Corporate High Yield Index 474bp -36
Bloomberg Barclays Pan-European High Yield Index 430bp -19
Bond yields (10yr)
USA 0.79% +8
Germany -0.52% +1
Japan 0.04% +2
UK 0.29% +4
EquitiesWeek-to-date change
S&P 500 3,447 +2.9%
DJ Euro Stoxx 50 3,256 +2.0%
FTSE 100 5,978 +1.3%
DAX 13,042 +2.8%
Nikkei 225 23,647 +2.7%
EUR/USD 1.18 +0.4%
JPY/USD 106.03 -0.7%
GBP/USD 1.29 0.0%
Brent Crude ($ per barrel) 43.34 +10.4%
WTI Crude ($ per barrel) 41.19 +11.2%
Gold ($ per ounce) 1,893.82 -0.3%

Source: Bloomberg, 09 October 2020. Prices close of business 08 October 2020.

Economic calendar

12 October: UK retail sales
13 October: Eurozone CPI, US CPI, eurozone economic sentiment survey
14 October: Japan industrial production
15 October: US jobless claims, US Philly Fed survey, eurozone industrial orders
16 October: US retail sales, US Michigan 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.

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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.

The investment manager may invest in instruments which can be difficult to sell when markets are stressed.

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