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    Market review

    Market review

    Key market movements

    Treasury yields drifted marginally higher over the quarter, but the short end of the curve remained well anchored.

    The US Federal Open Market Committee’s ‘dot plot’, which signals members' individual forecasts, suggested that inflation would not reach 2% until 2023. If correct, the Fed is likely to maintain monetary policy at highly accomodative levels for a considerable period.

    Corporate credit spreads tightened, with BBB-rated issuers and high yield credit outperforming.

    US equity markets experienced a strong, but volatile, quarter, with technology stocks rallying to record highs before giving back some of these gains at the end of the quarter.

    The US dollar broadly depreciated over the quarter.

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    The Committee recommended increases in future issuance sizes across all maturities but suggested that larger increases be undertaken in maturities out to 10 years.

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    Adrian Grey, Global Chief Investment Officer

    -3.9%

    Global GDP forecast for 20201

    -5.8%

    GDP contraction in developed markets in 20201

    2.1%

    GDP forecast in China, the only region expected to grow in 20201

    1.6%

    Inflation below target in DM in 20211

    Learn more about key market movements

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    CFTC provides additional relief for LIBOR transition

    The US Commodity Futures Trading Commission (CFTC) has announced2 that they have issued revised no-action letters which provide additional relief to swap dealers and market participants that are transitioning away from swaps that reference LIBOR. This is designed to help smooth the transition, particularly for older, legacy swap contracts by “removing regulatory obstacles to the adoption of potential protocols updating robust fallback procedures in the event that an IBOR ceases or becomes non-representative".

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    The curve steepens marginally as sentiment improves

    The Treasury yield curve shifted marginally higher and steeper over the quarter as shorter maturities remained anchored by Fed policy, but longer-maturity yields drifted higher after making strong gains in the previous quarter. The 2-year maturity Treasury yield declined by 2bp, the 10-year maturity Treasury yield rose by 3bp and the 30-year maturity Treasury yield rose by 6bp.

    Unprecedented levels of issuance raise concerns

    At its August presentation, the US Treasury Borrowing Advisory Committee estimated that Q3 2020 tax receipts were down by $351bn (-13%) versus Q3 2019 as a result of a change in tax deadlines to July 15. Total outlays rose by $1,648bn (+49%) versus Q3 2019 as a result of payments related to COVID-19 relief efforts.

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    Investment grade issuance smashes previous records

    • Cumulative investment grade credit gross issuance reached $1,835bn at the end of Q3
    • The previous annual high of $1,468bn was set in 2017.
    • Issuance started to climb in March as the coronavirus crisis led corporate treasurers to build liquidity buffers in anticipation of an uncertain future.
    • The Federal Reserve then reacted to the crisis with an unprecedented series of measures designed to support corporate liquidity, including the purchase of corporate debt funds.
    • With credit spreads contracting and nominal yields at historical lows, issuance continued to run at elevated levels through Q2 and Q3, broadeing from investment grade to the high yield market.

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