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    Weekly fixed income review: April

    Weekly fixed income review: April

    April 30, 2021 Fixed income
    Week to April 30, 2021
    • The US Federal Reserve (Fed) reiterated its commitment to its current easy monetary stance, following its latest policy update. While noting that US economic growth was encouraging, Fed chairman Jerome Powell stated that the recovery was “uneven and far from complete”, and that this prognosis merited a continuation of the Fed’s easy monetary policy stance. He emphasized that there are 8.5m fewer jobs in the US economy in comparison with February 2020, before COVID-19 swept through the country. Economic data continued to be strong. First-quarter GDP grew by 6.4%, on annualized basis, in the first quarter of the year, driven by public spending and renewed consumer spending, while initial jobless claims continued to fall.

    • Inflation expectations in the US rose to an eight-year high. Breakeven inflation rates rose to its highest level in eight years. The yield on 10-year Treasury Inflation-Protected Securities, which is an indicator of expected inflation, increased to over 2.4%, the highest level since 2013. The rise in the breakeven level coincided with the pledge of further massive public spending by US President Joe Biden. He announced an additional $1.8trn of measures directed at family support and wider education opportunities. This will be funded by both extra debt and higher taxation on wealthy individuals’ incomes and capital gains, with the proposed tax bands announced last week. The 10-year Treasury benchmark yield rose above 1.65% over the week before falling to 1.63%.

    • UK growth is predicted to be the highest in over 30 years. According to economists, the average expected growth rate for the UK in 2021 is currently 5.4%, which, if achieved, would mark the highest rate of growth since 1989. The consensus figure has risen from 4.2% in February and reflects optimism concerning the wide, and relatively quick, COVID-19 vaccination program in the UK and the gradual unlocking of restrictions. The 10-year gilt yield rose back above 0.8% during the week.

    • The European Central Bank expects a strong economic rebound in the second half of 2021. In a speech during the week, the central bank’s president, Christine Lagarde, stated that eurozone economic growth will likely surge in the latter six months of the year as the region’s vaccination program takes off and supply bottlenecks of vaccines disappear. Lagarde believes that 70% of the adult population will be vaccinated by mid-year, at least with the first jab. During the week, the 10-year German bund yield rose to a near two-year high of-0.19% while Italy’s 10-year benchmark bond yield rose to its highest level since late September.

    Chart of the Week: US 10-year Treasury yields have risen year-to-date

    Chart of the Week: US 10-year Treasury yields have risen year-to-date

    Source: Bloomberg. Data as of April 29, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 88bp -2
    Bloomberg Barclays Euro Corporate Index 84bp -1
    Bloomberg Barclays Sterling Non Gilts Index 91bp -1
    Bloomberg Barclays US Corporate High Yield Index 293bp -5
    Bloomberg Barclays Pan-European High Yield Index 292bp -6
    Bond yields (10yr)
    USA 1.63% +8
    Germany -0.19% +6
    Japan 0.10% +3
    UK 0.84% +10
    EquitiesWeek-to-date change
    S&P 500 4,211 0.7%
    DJ Euro Stoxx 50 3,997 -0.4%
    FTSE 100 6,961 0.3%
    DAX 15,154 -0.8%
    Nikkei 225 29,054 0.1%
    EUR/USD 1.21 0.2%
    JPY/USD 108.93 -1.0%
    GBP/USD 1.39 0.5%
    Brent Crude ($ per barrel) 68.56 +3.7%
    WTI Crude ($ per barrel) 65.01 +4.6%
    Gold ($ per ounce) 1,772.18 -0.3%

    Source: Bloomberg, April 30, 2021. Prices close of business April 29, 2021.

    Economic calendar

    03 May: Eurozone investor confidence, US and eurozone manufacturing PMI
    04 May: UK manufacturing PMI, UK consumer credit, US trade balance, US factory orders
    05 May: Eurozone PPI, US and eurozone services PMI
    06 May: Eurozone retail sales, US initial jobless claims, UK services PMI
    07 May: US non-farm payrolls, US unemployment, German industrial production, China trade balance

    Week to April 23, 2021
    • Wall Street firms raise large amounts of debt. Several major Wall Street firms have announced record levels of new debt over the past few days. A total of approximately $40bn has been, or is in the process of being, raised by banks such as JPMorgan, Bank of America and Morgan Stanley. The prevailing low cost of debt, as well as potential lending opportunities as economies recover after COVID-19, have been factors behind the large issuance. There are also regulatory issues regarding capital ratios, with the latter having become more stretched owing to very high levels of deposit growth. This has led banks to either purchase more Treasuries or deposit the money at the central bank, which requires higher levels of bank capital. Additionally, Bank of America’s CEO intimated that some of the money being raised could be used for the benefit of shareholders, for instance to buy back stock.
    • German bund yields were driven higher due to political developments. In Germany, the major political parties revealed their candidates for the upcoming federal/general elections due in September. The Greens put forward Annalena Baerbock, who has pledged to materially increase fiscal spending in the country, as its candidate. Opinion polls currently indicate that the Greens could take a substantial share of the vote. At the same time, the European Central Bank pledged to continue with its easy money stance and increase the rate of bond purchasing during the second quarter following its policy meeting on Thursday. The 10-year bund yield rose early in the week before falling back thereafter.
    • UK inflation rose in March. Consumer price inflation rose 0.7% year on year in March, largely driven by rising petrol and clothing prices. This was up from February’s 0.4% growth rate but the same level as January’s. Annual core consumer price inflation (which excludes energy and food) rose 1.1% in March. Although gilt yields barely reacted to the news, the market expects inflation to continue to pick up in the coming months owing to the combined effects of economic recovery and massive fiscal stimulus. In other economic news, unemployment unexpectedly fell to 4.9% in the three months to February while retail sales rose 5.4% over the month in March, significantly ahead of market expectations.
    • Fears of rising coronavirus cases and extended lockdowns drove risk-off sentiment in Japan. Japanese government bond prices rose and equities fell as new cases of COVID-19 caused speculation that tighter restrictions would be enforced in major urban areas of Japan, including Tokyo and Osaka. Investors fear that Japan’s economic recovery could be delayed significantly. Moreover, this summer’s Tokyo Olympic Games are looking increasingly unlikely to boost the economy as originally hoped, and indeed may not happen at all. Bond yields, with maturities of five years and above, fell. Meanwhile, ratings agency Standard & Poor’s reaffirmed Japan’s sovereign credit rating of ‘A+/A-1’, with a stable outlook, despite recent pandemic-related headwinds.

    Chart of the Week: 10-year German bund yield (%)

    Chart of the Week: Quarterly proceeds through issuance of sustainable bonds

    Source: Bloomberg. Data as of April 23, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 91bp +2
    Bloomberg Barclays Euro Corporate Index 85bp -1
    Bloomberg Barclays Sterling Non Gilts Index 92bp 0
    Bloomberg Barclays US Corporate High Yield Index 301bp +8
    Bloomberg Barclays Pan-European High Yield Index 297bp +5
    Bond yields (10yr)
    USA 1.54% -4
    Germany -0.25% +1
    Japan 0.07% -2
    UK 0.74% -2
    EquitiesWeek-to-date change
    S&P 500 4,135 -1.2%
    DJ Euro Stoxx 50 4,015 -0.5%
    FTSE 100 6,938 -1.2%
    DAX 15,321 -0.9%
    Nikkei 225 29,188 -1.7%
    EUR/USD 1.20 0.3%
    JPY/USD 107.97 0.8%
    GBP/USD 1.38 0.1%
    Brent Crude ($ per barrel) 65.40 -2.1%
    WTI Crude ($ per barrel) 61.43 -2.7%
    Gold ($ per ounce) 1,783.94 +0.4%

    Source: Bloomberg, April 23, 2021. Prices close of business April 22, 2021.

    Economic calendar

    26 April: US durable goods, Japan leading economic index
    27 April: US consumer confidence, US house prices, Japan retail sales
    28 April: Germany and France consumer confidence
    29 April: US initial jobless claims, US (Q1) GDP, UK house prices, Japan CPI
    30 April: Eurozone (Q1) GDP, eurozone unemployment, US Michigan consumer sentiment

    Week to April 16, 2021
    • US inflation rose further in March. The consumer price index rose by 2.6% year on year and by 0.6% over the month. The annual number marked the highest growth rate since August 2018, while the monthly one was the highest for almost nine years, with both figures ahead of market forecasts. Inflationary pressures mainly came from rising gasoline prices. Core price inflation, which excludes volatile energy and food components, was more muted, growing by 1.6% year on year in March and by 0.3% over the month – not too different from recent growth rates. The bond markets took a relaxed view of the inflation figures and Treasury yields fell over the week. This was despite strong retail sales and initial jobless claims figures released late in the week. The sanguine attitude from bond market investors encouraged equity markets, with many indices, including the S&P 500, touching new all-time highs.

    • UK GDP growth rate improves in February. GDP growth rose 0.4% over the month in February, following a 2.2% fall in January. Both manufacturing and construction recovered while the service sector eked out minimal growth. The economy appears to have continued to adapt well to the changing circumstances and uncertainties related to both COVID-19 and Brexit. However, GDP fell 1.6% in the three months to February and is still almost 8% below pre-pandemic levels. In an online discussion during the week, one member of the Bank of England’s Monetary Policy Committee, Silvana Tenreyro, cautioned against tightening monetary policy too quickly. She suggested that central bankers should remember the mistakes made following the Global Financial Crisis when monetary support was withdrawn too quickly and led to both a market and economic setback. Ten-year gilt yields were largely unchanged over the week.

    • The Bank of Japan’s governor cautioned on economic recovery. In a quarterly assessment of economic conditions, the head of Japan’s central bank Haruhiko Kuroda warned that Japan’s recovery from coronavirus would be delicate. This reflected the impact of rising infections across Japan and the need for the reimposition of lockdown restrictions in targeted areas. Kuroda suggested that, while the economy would recover owing to an improvement in global economies and the huge fiscal stimulus enacted both in Japan and overseas, the recovery may be more muted than previously expected. Government bond yields across all maturities dropped marginally over the week.

    • Fitch announced a delay to further sovereign ratings cuts. The credit ratings agency Fitch stated that it would likely delay downgrades of many countries that it currently has on a negative outlook until economic conditions are clearer next year. This reflects a growing sense that the impact on global economies from the coronavirus can be rapidly overcome, with lost economic growth being quickly recovered. Fitch has downgraded more countries’ sovereign ratings during this crisis than either Moody’s or S&P but looks set to pause any further downgrades, according to comments from Fitch’s managing director for global sovereigns and supranationals.

    • Issuance of sustainable bonds reached a record high. Issues of sustainable or ‘green’ bonds rose to a record high in the first quarter of the year. According to data from Refinitiv, issuance of such bonds rose to $264bn in the three months to 31 March, continuing a sequence of ever-increasing issuance from governments, financial institutions and other corporations. The rising totals reflect both the desire for, and pressure on, issuers and investors to embrace sustainability.

    Chart of the Week: Quarterly proceeds through issuance of sustainable bonds

    Chart of the Week: Quarterly proceeds through issuance of sustainable bonds

    Source: Bloomberg. Data as of April 15, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 88bp -1
    Bloomberg Barclays Euro Corporate Index 87bp 0
    Bloomberg Barclays Sterling Non Gilts Index 93bp -1
    Bloomberg Barclays US Corporate High Yield Index 296bp +4
    Bloomberg Barclays Pan-European High Yield Index 295bp -1
    Bond yields (10yr)
    USA 1.58% -8
    Germany -0.29% +1
    Japan 0.09% -2
    UK 0.74% -4
    EquitiesWeek-to-date change
    S&P 500 4,170 1.0%
    DJ Euro Stoxx 50 3,993 0.4%
    FTSE 100 6,984 1.0%
    DAX 15,255 0.1%
    Nikkei 225 29,643 -0.4%
    EUR/USD 1.20 0.6%
    JPY/USD 108.76 0.8%
    GBP/USD 1.38 0.6%
    Brent Crude ($ per barrel) 66.94 +6.3%
    WTI Crude ($ per barrel) 63.46 +7.0%
    Gold ($ per ounce) 1,763.95 +1.2%

    Source: Bloomberg, April 16, 2021. Prices close of business April 15, 2021.

    Economic calendar

    19 April: Japan industrial production
    20 April: China PBoC interest rate decision
    21 April: Canada CPI
    22 April: Europe ECB rate interest rate decision
    23 April: Europe PMI

    Week to April 9, 2021
    • The International Monetary Fund (IMF) raised its global economic outlook. Based on the current rollout of COVID-19 vaccines, as well as the huge monetary and fiscal stimulus unleashed (especially in the US), the IMF now forecasts economic growth to rise by 6.0% (previously 5.5%) this year and 4.4% (instead of 4.2%) in 2022. The IMF expects the UK to be the fastest-growing G7 country in 2022, growing by 5.1%, following an estimated 5.3% expansion in 2021. This largely reflects the relatively fast vaccination rollout in the UK.

    • US Treasury yields gently declined over the week. The Federal Open Market Committee’s March meeting minutes reassured markets by reconfirming that monetary policy was unlikely to be tightened given still uncertain economic conditions and muted inflationary pressures. Bond yields fell back from recent high levels, with the 10-year Treasury yield falling to approximately 1.65%. Additionally, some investors expect Joe Biden’s $2.3trn infrastructure plan to be watered down, given Republican party opposition to certain elements of it. Initial jobless claims for the week ending 3 April were also higher than expected.

    • Corporate spreads tightened. Over the past week corporate spreads tightened 2bp to 89bp as issuance slowed and pension buying continued. This follows 6bps of tightening the week before. Next week the market will pivot its focus to earnings, which should be up over 20% year over year. Organon, Americo, and Mass Mutual issued, while the week before there was about $20 billion in new issuance, highlighted by deals from Meritage, Parkland, Deutsche Bank, Kohl’s and Burlington Northern.

    • Minutes from the latest European Central Bank (ECB) meeting were released. The minutes revealed a continuation of the ECB’s dovish stance, albeit with a hint of greater flexibility to adjust measures as conditions dictate. According to data from Dutch bank ING, government bond issuance in the first quarter of 2021 totaled €373bn, an increase of 20% over the same period last year. The low cost of debt and the requirement for large fiscal spending to fight the COVID-19 pandemic drove the high level of issuance.

    Chart of the Week: Rise in yields on 10-year Treasuries stalls

    Chart of the Week: Rise in yields on 10-year Treasuries stalls

    Source: Bloomberg. Data as of April 9, 2021.

    Economic calendar

    12 April: Eurozone retail sales, UK retail sales
    13 April: China trade balance, UK industrial production, UK GDP (February), US CPI
    14 April: Eurozone industrial production
    15 April: US retail sales, US initial jobless claims
    16 April: China GDP (Q1), eurozone CPI, US housing starts, US Michigan consumer sentiment

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