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    Weekly fixed income review: April

    Weekly fixed income review: April

    April 29, 2022 Fixed income
    Week to April 29, 2022
    • Negative yields vanish in corporate bonds. Bloomberg revealed early in the week that all investment grade corporate bond issues in its global tracker index were now trading at a yield of at least zero for the first time since the beginning of the pandemic. In August 2021, at least $1.5trn of issues in the index had a negative yield, with the majority occurring in Europe. The era of negative yield credit started in early 2015 when some large corporate issuers such as Nestlé first experienced negative bond yields on four-year euro denominated credit – a comparable security from Nestlé now yields just over 1%. Tighter monetary policy and expectations of higher interest rates in 2022 have helped raise the average yield of Bloomberg’s global index tracker to 3.7%. US corporate spreads were wider at 135bp with issuers such as Boeing, Comcast, and General Electric being notable underperformers after messy earnings. New issuance was moderate with deals from Waste Management, PG&E, and American Express.

    • Global bond markets rise as concerns about economic growth trumps inflation worries. The 10-year US Treasury yield fell from 2.9% at the start of the week to 2.75%, before increasing somewhat, while the 10-year gilt yield declined to 1.8% from just below 2.0% at the start of the week, before rising back to 1.9%. The recent tightening of COVID-19 restrictions in Beijing, worsening supply bottlenecks at Chinese ports, tightening US monetary policy, growing threats from Vladimir Putin to the West, and a lack of any progress towards peace in Ukraine unsettled investors.

    • US GDP unexpectedly declines in the first quarter of 2022. First-quarter GDP fell 1.4% on an annualized basis, the first fall in seven quarters, largely due to weakening net exports, reduced public spending, and lower inventory formation. Encouragingly, growth in consumer spending accelerated. However, the figure took the markets by surprise as market consensus had been for a rise in GDP over the first quarter.

    • Muni fund outflows continue. Lipper's combined weekly and monthly reporting funds registered outflows of $2.9 billion (the 16th consecutive week) bringing year-to-date outflows to $41.5 billion. Muni ETF’s though did bounce back after last week’s outflows, this time reporting $288 million of inflows. On Thursday, AAA rated tax-exempt muni yields were reported to have increased by 2 basis points three years outwards. Across the high grade curve munis underperformed U.S. Treasuries.  Muni to Treasury yield ratios increased by 3 ratios to 84% at five years, by 3 ratios to 94% at 10 years and by 1 ratio to 104% at 30 years. On the new issue front, the deals that came to market, including several AA rated issuers; UCAL Regents Med Ctr, IPA and Beaumont Spectrum MI Health, did very well with heavy oversubscriptions. The upcoming negotiated calendar plummets to a little over $4 billion after two weeks of fairly heavy supply.

    • UK government borrowing halves. Figures from the Office for National Statistics showed that public sector net borrowing dropped from a pandemic-inflated £317.6bn in the previous financial year (to April 2021) to £151.8bn last financial year. The deficit amounted to 6.4% of GDP, while total outstanding public sector debt was 96.2% of GDP as tax receipts expanded to their highest ever level of £718bn. The relatively healthier-than-expected figures are expected to put further pressure on the government to either reduce taxes or provide support to struggling households.

    • The Bank of Japan (BoJ) continues loose monetary policy stance. The central bank announced that it would take measures to preserve its 0.25% yield cap on the 10-year Japan government bond (JGB) yield, by buying unlimited  amounts of JGBs on a daily basis, if required. The statement underlined the BoJ’s determination to keep monetary policy loose while inflation remains well below its 2.0% target and economic growth is moderate. This stance is despite the clear tightening of monetary policy in many other countries, especially the US, and the implications for the yen, which has dropped to a 20-year low against the US dollar of around 130.

    Bloomberg table 29-4-22.svg

    Source: Bloomberg, April 29, 2022. Prices close of business April 28, 2022.

    Economic calendar

    02 May: Eurozone consumer confidence, US manufacturing PMI, German retail sales
    03 May: Eurozone PPI, eurozone unemployment, US factory orders
    04 May: UK consumer credit, eurozone retail sales, US (ADP) private employment, US trade balance
    05 May: UK BoE policy report/interest rate decision, German factory orders, US initial jobless claims
    06 May: Japan CPI, UK (Halifax) house prices, US non-farm payrolls, US unemployment

    Week to April 22, 2022
    • US Treasury yields rose early in the week as inflationary expectations remained elevated. The 10-year Treasury yield rose above 2.9%, its highest level since late 2018, before easing a little. Two-year Treasury yields also rose to above 2.6%, meaning the yield gap with 10-year Treasuries declined around 15-20bp. Additionally, the yield on 10-year Treasury Inflation-Protected Securities rose briefly above zero for the first time since March 2020. US Federal Reserve (Fed) Governor Jerome Powell said a 50bp hike in interest rates “will be on the table” at the next Fed policy meeting, and that “it is appropriate to be moving a little more quickly” in terms of monetary tightening. This was a theme taken up earlier in the week by Fed board member James Bullard who is calling for rates to be 3.5% by the end of the year. In his view, this would represent a neutral level. He stated that inflation was “far too high” and a much faster and larger adjustment to interest rates was necessary, including a possible 75bp hike in May. Currently, market rate expectations are pricing in a Fed funds rate of 2.5%-2.75% by year-end, with the probability of a 50bp hike in May close to 100%.

    • Munis outperformed Treasuries over the week. Munis outperformed US Treasuries through 5 years over the week; however, they significantly underperformed from 10 to 30 years with rates increasing 20 basis points for those segments of the curve. Yield ratios increased to 91% in 10 years and to 103% in 30 years reflecting a cheapening in muni relative valuations. Lipper's combined weekly and monthly reporting funds registered outflows of $3.5 billion (the 15th consecutive week) bringing year-to-date outflows to $38.6 billion. Bid-wanted activity, which peaked at $3.2 billion on Wednesday, weighed on the market, before reversing to $1.9 billion on Thursday. Outflows were experienced by all muni fund categories including tax-exempt money funds and, notably ETFs which for the first time in a while reported outflows of $272 million. On the new issue front, there was an $854 million deal for a Midwest company. Ten-year puts were at +135 and were 3.6 over while the 30-year term were 5’s at +180 and 1.4 times over. We participated in the 10 year puts and the 30-year term. We also participated in NJ student loan and San Juan CA USD. The upcoming negotiated calendar appears to be heavier at $10 billion next week.

    • Euro area and German inflation levels soar. The annual consumer inflation rate in the euro area rose significantly in March to 7.4% from 5.9%, reflecting a similar increase in German inflation, which shot higher to 7.3% from 5.1%, mainly driven by higher energy costs. It marked the highest rate for 41 years for the euro area. Meanwhile, producer price inflation jumped to 4.9% in March alone, and to 30.9% year on year, a record rate for the fourth consecutive month. The 10-year German Bund yield climbed above 0.9% for the first time in seven years.

    • The IMF reduces global economic forecast. Citing the impact of Russia’s invasion of Ukraine, the ensuing sanctions against Russia from the West, soaring energy costs and reduced consumer spending, the IMF lowered its forecast for global GDP growth to 3.6% in both 2022 and 2023, a reduction of 0.8% and 0.2%, respectively, from its previous estimates in January. The UK’s growth outlook was cut from 4.7% to 3.7% this year, and from 2.3% to 1.2% in 2023, which is the lowest forecast among G7 nations, as UK economic output slows and inflation bites (with the latter expected to peak at a higher rate than in other European countries). The IMF also raised its expectations on global inflation, increasing its average inflation forecast for developed economies from 3.9% to 5.7% in 2022.
    • Financial distress levels rise in emerging market economies. In a separate study -the six-monthly Global Financial Stability Report - the IMF revealed figures that show that more than 20% of hard-currency corporate debt issuers in emerging markets have bond issues trading at distressed levels, above 1000bp over Treasuries. This reflects a combination of slowing economic growth, tightening monetary policy (especially in the US), and surging energy and food costs. While the report forecast that distress levels would rise further from here, the risks were not yet considered to be systemic.
    Bond spreads (over govts) Week-to-date change (bp)
    Bloomberg US Corporate Index 128bp +7
    Bloomberg Euro Corporate Index 137bp +3
    Bloomberg Sterling Non Gilts Index 122bp +2
    Bloomberg US Corporate High Yield Index 345bp -4
    Bloomberg Pan-European High Yield Index 404bp -3
    Bond yields (10yr)
    USA 2.91% +8
    Germany 0.95% +11
    Japan 0.25% +1
    UK 2.01% +12
    Equities Week-to-date change
    S&P 500 4,394 0.0%
    DJ Euro Stoxx 50 3,928 2.1%
    FTSE 100 7,628 0.2%
    DAX 14,502 2.4%
    Nikkei 225 27,553 1.7%
    Currencies
    EUR/USD 1.08 0.2%
    JPY/USD 128.38 -1.5%
    GBP/USD 1.30 -0.2%
    Commodities
    Brent Crude ($ per barrel) 108.33 -3.0%
    WTI Crude ($ per barrel) 103.79 -3.0%
    Gold ($ per ounce) 1,951.62 -1.3%

    Source: Bloomberg, April 22, 2022. Prices close of business April 21, 2022.

    Economic calendar

    25 April: Japan leading indicators, UK Rightmove house price index
    26 April: US durable goods, US consumer confidence, China trade balance
    27 April: German consumer confidence, US trade balance
    28 April: US (Q1) GDP, US initial jobless claims, eurozone economic sentiment
    29 April: Eurozone (Q1) GDP, China Caixin manufacturing PMI, US (Michigan) consumer sentiment

    Week to April 8, 2022
    • Federal Open Market Committee (FOMC) meeting minutes show central bank’s plans to commence quantitative tightening. The minutes revealed that the FOMC was considering starting to shrink its balance sheet, which totals close to US$9trn, by ending the reinvestment of proceeds from maturing bonds as early as next month. Although the plan has not yet been finalized, there appeared an agreement among policymakers was reached on an initial reduction of up to US$95bn bonds per month (US$60bn in Treasuries and US$35bn in agency mortgage-backed securities). The prospect of quantitative tightening followed increasingly hawkish soundings coming from US central bank policymakers during the week. US Federal Reserve (Fed) Vice-Chair nominee, Lael Brainard, had suggested that the Fed may begin to tighten policy more aggressively next month, seeking to take its stance back towards neutral. Consequently, government bond yields increased further. At the beginning of the week, the two-year Treasury yield climbed to 2.5%, its highest level for over three years, rising above the 10-year yield and causing another inversion of the yield curve; however, the 10-year yield subsequently surged ahead, and the curve steepened again. Expectations in the market for a 50bp rate hike in May have risen above a 75% conviction level, with 200-220bp of interest rate hikes now expected over the remainder of 2022.

    • European Central Bank (ECB) policy meeting minutes show officials have become much more concerned about inflation. According to the minutes from early March, several members of the policy committee appeared to want to roll back stimulus immediately rather than keep to the agreed timetable, which would currently see the ECB’s bond purchasing scheme end in the third quarter and interest rates left unchanged until then. Several senior policymakers had hinted at tightening monetary policy during the week. ECB board member Isabel Schnabel suggested that the central bank would need to raise rates in the third quarter, immediately after the final cessation of the bond-purchasing scheme. This was a view also taken by Bundesbank president Joachim Nagel who stated that interest rates would need to go up soon. With eurozone inflation hitting record highs, it may be that the ECB has fallen behind the curve, especially as the Fed and some other central banks have now commenced tightening policy. Market expectations for eurozone interest rates at the end of 2022 currently stand at over 0.6%. The 10-year Bund yield briefly rose above 0.7% during the week, its highest level for four years, while the 10-year breakeven rate rose to 2.8%, the highest since 2009.

    • Munis outperformed Treasuries over the week. Munis outperformed Treasuries and yield ratios fell across the curve for the week. The AAA rated tax-exempt muni to Treasury yield ratio fell from 94% to 87% in 10-years, and from 104% to 99% in 30-years. Bid-wanteds climbed again to close to $2 billion.  Lipper's combined weekly and monthly reporting funds indicated outflows of $5.2 billion (the 13th consecutive week) bringing year-to-date outflows to $27.1 billion. Once again, ETFs stood in sharp contrast reporting $434 million of inflows. The upcoming negotiated calendar is somewhat limited at $4 billion including day to day issues as next week is marked by the religious observances of Passover and Good Friday.  30-day visible is still elevated at $13.4bn.

    • JPMorgan warned about a growing tide of corporate debt defaults in emerging markets. In a report published at the beginning of the week, JPMorgan suggests that the market must brace itself for the largest number of defaults of corporate bonds since the Global Financial Crisis. Specifically, the report forecasts a more than doubling of the emerging market corporate bond default rate, from 3.9% at the start of the year to 8.5% by year-end. Within emerging markets, eastern European borrowers are expected to be the worst affected, with a forecast default rate of 21.1%. The war in Ukraine and well-publicized problems in the Chinese property market have converged to create an environment where default risks in emerging market debt markets are likely to rise.

    Bloomberg table 8-4-22.svg

    Source: Bloomberg, April 8, 2022. Prices close of business April 7, 2022.

    Economic calendar

    11 April: UK industrial production, UK trade balance, UK GDP (Feb), China inflation
    12 April: US CPI, eurozone economic sentiment, UK unemployment, UK retail sales
    13 April: UK CPI, PPI and RPI, US PPI, China trade balance
    14 April: ECB monetary policy statement, US retail sales, US initial jobless claims
    15 April: US industrial production, US NY Empire State manufacturing

    Week to April 1, 2022
    • The US Treasury bond yield curve inverts. Having contracted materially through the first few months of the year, the much-watched two-year/10-year Treasury bond yield curve inverted mid-week for the first time since late 2019. This followed the inversion of the five-year/30-year section of the yield curve earlier in the week, which was the first time this had happened since 2006. In the past such inversions have been usually followed by an economic recession within one to two years. With the market pricing in well over 200bp of tightening from the Federal Reserve over the remainder of the year, short yields have soared. The 10-year Treasury yield fell towards the end of the week, from its recent near three-year high of just over 2.5%, as oil prices declined on news of the US plan to release reserves into the market.
    • US credit rallies. Corporate spreads were 5bp tighter at 116bp as spreads rallied into quarter end amid potentially promising Russia-Ukraine headlines. Overseas demand has remained strong, which caused long dated paper rated A or better to perform well. New issuance was about $30 billion including deals from DTE, CoreBridge, Broadcom, California Health and others.

    • Eurozone inflation surges to new high. Annual inflation in the eurozone rose by 7.5% in March, up from 5.9% in February, and much higher than was expected by the market. Energy prices continued to be a significant contributor to the rises, growing by 44.7% year on year. Meanwhile, European Central Bank (ECB) President Christine Lagarde warned that the risks of stagflation had risen in a speech. She emphasised the risks to both growth and inflation coming from the war in Ukraine and the subsequent surge in energy prices, stating: “We will face, in the short term, higher inflation and slower growth”. Recent economic sentiment and consumer confidence indicators in the eurozone have fallen markedly while inflation rates remain at record highs. Together, these are an indication of future stagflation, although Lagarde, while recognising the increasing risks, still believes it could be avoided. The market is currently pricing in at least one interest-rate hike later in the year, with expectations of the sum of future increases now above 60bp. Higher inflation breakeven levels drove eurozone government bond yields higher over the week, with the two-year Bund yield breaking into positive territory for the first time since 2014, and the 10-year yield climbing above 0.7%, its highest level for over four years, before falling back.

    • The Bank of Japan (BoJ) increases purchases of 10-year government bonds to reverse climb in yields. In a move that emphasises the widening disparity in the monetary policy stance taken by the BoJ compared with that of most other major central banks, the Japanese central bank purchased government bonds during the week. There has been recent speculation that the BoJ was happy to allow yields to drift upwards, with a relaxation of the allowable upper band set at 0.25%. However, as the yield rose above 0.25%, the BoJ intervened. This action has further weakened the yen, which climbed above 124.5 against the US dollar early in the week, down from approximately 115 at the beginning of the month. Additionally, longer-dated Japanese government bond (JGB) yields have continued to rise, leading to a steeper yield curve. The yield on 30-year JGBs rose to 1.1%, the highest level for six years.

    • Municipal bonds cheapen relative to Treasuries. Munis ended March on a high note as higher yields attracted buyers in the secondary market. However, for most of the week until yesterday, munis significantly underperformed U.S. Treasuries and yield ratios increased to potentially attractive levels for crossover investors. Lipper's combined weekly and monthly reporting funds indicated another $2.0 billion of outflows which is the 12th consecutive week of outflows bringing year-to-date outflows to $21.9 billion. The negotiated new issue calendar is expected to increase to approximately $10 billion next week including taxable muni issuance of over $2 billion. According to Bloomberg, the muni market suffered its worst quarter in forty years with a -6.4% return for the Municipal Bond Index. Relative stability may return to our market as munis are now relatively cheap to Treasuries and we are rolling out of tax time and moving towards a more supportive mid-year seasonal reinvestment period. The caveats are the macro impact of inflation/Fed on rates and vol and the muni supply and mutual fund outflow picture. 

    Bloomberg table 1-4-22.svg

    Source: Bloomberg, April 1, 2022. Prices close of business March 31, 2022.

    Economic calendar

    04 April: US factory orders, eurozone investor confidence
    05 April: US and eurozone composite PMI, US trade balance
    06 April: Eurozone PPI, German factory orders
    07 April: UK Halifax house price survey, US initial jobless claims, eurozone retail sales
    08 April: Japan consumer confidence

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