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    Weekly fixed income review: July

    Weekly fixed income review: July

    July 31, 2020 Fixed income
    Week to July 31, 2020
    • Coronavirus fears resurface. News of local outbreaks in parts of Spain and record numbers of deaths in some US states impacted risk appetite mid-week, pushing down yields of core European bonds, gilts and US Treasuries.
    • US Federal Reserve (Fed) keeps rates on hold. After a two-day meeting, Fed policymakers opted to keep rates on hold, while reiterating a commitment to bolster the economy further if required. With US interest rates in the range of 0.00–0.25%, there had been a view that the Fed would announce alternative, indirect ways to boost the US economy. The Fed did, however, extend dollar swap lines with other central banks for a further year.
    • Gilt yields fall; five-year paper touches fresh low. Gilt yields retreated over the week; the benchmark 10-year gilt falling to 0.075% and the five-year gilt yield slipping to -0.135%, a record low.
    • US dollar falls to a two-year low. Doubts about the strength of the US recovery were reflected in both currency and bond markets. The US dollar sagged while the 10-year Treasury bond yield retreated to 0.546%.
    • Eurozone bond yields stay low. Core European bonds were anchored by ongoing central-bank support and risk aversion. The benchmark German bund yield ended the week deeper in negative territory, at -0.549%. It was a similar story in France, where the 10-year OAT yield moved from -0.185% to -0.214%.
    • US investment-grade credit spreads broadly unchanged. The ICE BofA BBB US Corporate Index Option-Adjusted Spread moved a shade higher mid-week, before falling back. Industrial earnings have generally proven less bad than expected, helping sentiment somewhat, with GM, GE, and Boeing each burning less cash than expected. New issuance picked up modestly led by AT&T and a FedEx EETC deal.

    Chart of the Week: Government bond yields back to March's record lows

    Chart of the Week: The spread between 10-year German bunds and Italian bonds continues to narrow (%)

    Source: Bloomberg as at 31 July 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 133bp +2
    Bloomberg Barclays Euro Corporate Index 128bp +3
    Bloomberg Barclays Sterling Non Gilts Index 133bp 0
    Bloomberg Barclays US Corporate High Yield Index 491bp -13
    Bloomberg Barclays Pan-European High Yield Index 475bp +14
    Bond yields (10yr)
    USA 0.55% -4.26
    Germany -0.54% -9.4
    Japan 0.02% +0.2
    UK 0.09% -5.6
    EquitiesWeek-to-date change
    S&P 500 3,246 0.95%
    DJ Euro Stoxx 50 3,208 -3.10%
    FTSE 100 5,990 -2.19%
    DAX 12,380 -3.57%
    Nikkei 225 22,339 -1.81%
    Currencies
    EUR/USD 1.18 1.64%
    JPY/USD 104.73 1.35%
    GBP/USD 1.31 2.36%
    Commodities
    Brent Crude ($ per barrel) 42.94 -0.92%
    WTI Crude ($ per barrel) 39.92 -3.32%
    Gold ($ per ounce) 1,956.64 2.87%

    Source: Bloomberg, 31 July 2020. Prices close of business July 30, 2020

    Economic calendar

    August 3: China’s Caixin manufacturing PMI
    August 4: Reserve Bank of Australia’s interest rate decision
    August 5: US balance of trade
    August 6: Bank of England’s interest rate decision
    August 7: US non-farm payrolls; Germany’s balance of trade

    Week to July 24, 2020
    • European recovery fund agreed. After days of debate, EU leaders settled the terms of a €750bn recovery fund. First proposed by France and Germany in May, the fund will include €390bn of grants and €360bn of loans for economically weaker members of the EU. To finance it, the European Commission will be using capital markets for the first time.
    • Peripheral European yields fall. Yields on government bonds from ‘peripheral’ European countries, namely Italy and Spain, retreated as investors digested news of the new recovery fund. The 10-year Spanish government yield fell to 0.34%, while the yield on the Italian 10-year bond slipped to 1.10%.
    • Ten-year US Treasury yield declines. The yield on the benchmark Treasury bond fell over the week, although US stocks surged and the Nasdaq touched new highs. Yields were lower after an admission from President Trump that the COVID-19 outbreak in the US “will get worse before it gets better”, causing investors to retain some caution.
    • Argentina’s creditors propose new restructuring plan. Groups of bondholders are preparing a new debt-restructuring plan that would see them recover around 55 cents on the dollar. The plan aims to end the stalemate in negotiations between Argentina and its creditors over bonds issued in 2005, 2010 and from 2016 onwards. Argentina’s terms originally included a 66% “haircut” (write-off) of the debt; subsequent proposals have been rejected by its creditors.
    • Record UK government cash deficit. Data released by the Office for National Statistics revealed a record cash deficit of £174bn between April and June. Predictably, public spending dwarfed tax receipts over the period – VAT revenue took a further hit as companies deferred their payments. In the same period last year, the deficit was £20.3bn.
    • Global investment-grade credit spreads tightened as a degree of risk appetite returned to markets. In the US, corporate spreads tightened by 9 basis points (bp) to 129bp due to hopes of a COVID-19 vaccine and a lack of issuance. New issuance was essentially non-existent amid an earnings blackout, which bid up secondary spreads. Noble Energy’s spreads tightened by 200bp after Chevron agreed to purchase the oil company. Meanwhile, spreads in both First Energy and Nividia widened by over 50bp. The former was due to a bribery scandal and the latter to a rumored acquisition. In Europe, technicals in the market remain strong due to ongoing inflows while supply remains muted.

    Chart of the Week: The spread between 10-year German bunds and Italian bonds continues to narrow (%)

    Chart of the Week: The spread between 10-year German bunds and Italian bonds continues to narrow (%)

    Source: Bloomberg as at 24 July 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 130bp -6
    Bloomberg Barclays Euro Corporate Index 126bp -9
    Bloomberg Barclays Sterling Non Gilts Index 133bp -4
    Bloomberg Barclays US Corporate High Yield Index 504bp -52
    Bloomberg Barclays Pan-European High Yield Index 463bp -24
    Bond yields (10yr)
    USA 0.58% -5
    Germany -0.48% -3
    Japan 0.02% -1
    UK 0.12% -4
    EquitiesWeek-to-date change
    S&P 500 3,236 +0.3%
    DJ Euro Stoxx 50 3,372 +0.2%
    FTSE 100 6,211 -1.3%
    DAX 13,103 +1.4%
    Nikkei 225 22,752 +0.2%
    Currencies
    EUR/USD 1.16 1.5%
    JPY/USD 106.86 0.1%
    GBP/USD 1.27 1.4%
    Commodities
    Brent Crude ($ per barrel) 43.31 +0.4%
    WTI Crude ($ per barrel) 41.07 +1.2%
    Gold ($ per ounce) 1,887.44 +4.3%

    Source: Bloomberg, 24 July 2020. Prices close of business July 23, 2020

    Economic calendar

    July 27: Ifo business climate; US durable goods orders
    July 28: Spain’s unemployment (Q2)
    July 29: US Fed’s interest rate decision
    July 30: US GDP (Q2)
    July 31: Euro area GDP (Q2); China NBS manufacturing

    Week to July 17, 2020
    • US Treasury yields declined on economic and COVID-19 fears. Yields fell across the curve as investors sought out the relative safety of bonds, faced with a weak economic recovery and rising numbers of new coronavirus cases across many states, such as California and Florida. Yields fell back to levels last seen in April.
    • The US budget deficit rose to an all-time monthly high in June. The deficit rose to $864bn, a new monthly record, reflecting the impact of the coronavirus on economic activity and the resulting diminished tax receipts, as well as the government’s massive spending program to support the economy.
    • Eurozone bond yields fell during the week. Rising risk aversion, stemming from the renewed rise in COVID-19 cases in the US (and elsewhere) and the dire economic outlook, led investors to seek out the relative safe haven of core eurozone bond markets. Yields fell back, in aggregate, after rising early in the week.
    • Two-year UK bond yields fell below the equivalent bond yields in Japan. Two-year gilt yields fell to -0.13%, falling below the level currently offered on two-year Japanese bonds, before recovering a little, late in the week (see Chart). This continues a trend seen over the last few weeks, in which longer-dated UK bonds initially have fallen below those of Japan. Some bond commentators have suggested that this marks the UK’s entry into a similar protracted deflationary period as experienced by Japan over the past several years.
    • The Bank of Japan cut its economic forecasts. Following its June policy meeting, the Bank announced that it expected GDP to fall 4.7% in the financial year to March 2021. Additionally, it forecasts that inflation will fall 0.5%, a long way off its long-term target of 2% growth in inflation. The committee voted to keep its current interest rate policy unchanged.
    • US corporate spreads tightened 4bp to 138bp, as vaccine hopes outweighed the rising new coronavirus case count. Bank earnings were largely in line with expectations, featuring large reserves and outsized trading gains. Industrial companies will report in larger numbers next week. New issuance was very light, although Carnival and Norwegian cruises both took advantage of the strong market to issue.
    • Technicals in the European credit market are strong as inflows continue to come in. Cyclicals (such as auto bonds) have continued to outperform, retracing the slight widening in spreads that occurred in the middle of June. Primary market issuance is quiet now, given that we are going through the earnings season, which means companies are in a blackout period.

    Chart of the Week: 2-year gilt yields continue to decline (%)

    Chart of the Week: 2-year gilt yields continue to decline (%)

    Source: Bloomberg as at 17 July 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 138bp -5
    Bloomberg Barclays Euro Corporate Index 136bp -7
    Bloomberg Barclays Sterling Non Gilts Index 138bp -2
    Bloomberg Barclays US Corporate High Yield Index 558bp -39
    Bloomberg Barclays Pan-European High Yield Index 491bp -14
    Bond yields (10yr)
    USA 0.62% -3
    Germany -0.47% 0
    Japan 0.03% 0
    UK 0.14% -2
    EquitiesWeek-to-date change
    S&P 500 3,216 +1%
    DJ Euro Stoxx 50 3,365 +2.1%
    FTSE 100 6,251 +2.5%
    DAX 12,875 +1.9%
    Nikkei 225 22,770 +2.2%
    Currencies
    EUR/USD 1.14 +0.7%
    JPY/USD 107.27 -0.3%
    GBP/USD 1.26 -0.5%
    Commodities
    Brent Crude ($ per barrel) 43.37 +0.3%
    WTI Crude ($ per barrel) 40.75 +0.5%
    Gold ($ per ounce) 1,797.16 -0.1%

    Source: Bloomberg, 17 July 2020. Prices close of business July 16, 2020

    Economic calendar

    July 20: Eurozone PPI, PBoC interest rate decision
    July 21: UK public sector borrowing
    July 22: US housing price index
    July 23: US jobless claims, UK consumer confidence index
    July 24: UK retail sales, eurozone business confidence

    Week to July 10, 2020
    • In the US, yields rose and the yield curve steepened. Concerns about the strength of the economic recovery and the rising number of new Covid-19 cases across certain US states (particularly in the south and west of the country), has led to some profit-taking in longer-dated bonds. This, in turn, caused a mild steepening in the yield curve.
    • Treasury yields fell as risk aversion returns. Bond prices rose and yields fell as investors sought out safe havens, with the number of new cases of coronavirus soaring in several states in the US. The main equity indices, namely the Dow Jones and the S&P 500, fell during the week, with some investors fleeing to fixed income markets.
    • In Europe, bond yields fell through much of the week as worries about the economic outlook intensified. European bond prices rose and yields fell, especially in southern European states. The buying interest emerged owing to further fears about the economic backdrop, as well as confidence regarding the monetary support provided by the European Central Bank, and despite massive new issuance. The yield on Italian 10-year bonds fell to near four-month lows of just over 1.2%, during the week. Yields in Greek and Spanish bond markets followed a similar trajectory, and spreads over German bonds narrowed to levels last seen in March, before rising again in the past day or two.
    • In the UK, the chancellor unveiled his new stimulus plans for the economy. The measures incorporated in the plan amount to approximately £30bn of stimulus, amounting to around 1.5% of GDP. Ten-year gilt yields rose on the news but fell back to end the week marginally lower. There are doubts in the market around the ability of the stimulus measures to properly alleviate the expected economic fallout in the UK.
    • There has been a slowdown in corporate bond issuance. Following massive debt issuance over the past few months from the corporate sector, there has been a detectable slowdown in issuance over the past week or so. According to Refinitiv, last week’s debt issuance dropped to the lowest level since March, at $70bn. This may represent a ‘wait-and-see’ policy adopted by many companies after a period of substantial debt raising.
    • US corporate spreads tightened by 5bp as the slowdown in issuance provided a favourable technical backdrop. Markets continue to downplay the rise in new Covid-19 cases given the belief that renewed widespread lockdowns are unlikely. New issuance was light due to earnings ‘blackouts’ but Ocansa, Choice Hotels, and Alcoa did issue bonds. Weakness has crept into euro credit over the last two sessions or so. Subordinated paper trading was down a little (especially today) and new issues generally weaker (especially Bayer’s new E6bn issue last week).

    Chart of the Week: Italian-German 10-year bond yield spread

    Chart of the Week: Italian-German 10-year bond yield spread

    Source: Bloomberg as at 10 July 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 143bp -1
    Bloomberg Barclays Euro Corporate Index 142bp -3
    Bloomberg Barclays Sterling Non Gilts Index 140bp -3
    Bloomberg Barclays US Corporate High Yield Index 597bp -3
    Bloomberg Barclays Pan-European High Yield Index 501bp -2
    Bond yields (10yr)
    USA 0.61% 6
    Germany -0.46% -3
    Japan 0.03% 0
    UK 0.16% -3
    EquitiesWeek-to-date change
    S&P 500 3,152 +0.7%
    DJ Euro Stoxx 50 3,261 -1.0%
    FTSE 100 6,050 -1.7%
    DAX 12,489 -0.3%
    Nikkei 225 22,529 +1.0%
    Currencies
    EUR/USD 1.13 +0.3%
    JPY/USD 107.20 +0.3%
    GBP/USD 1.26 +1.0%
    Commodities
    Brent Crude ($ per barrel) 42.35 -1.1%
    WTI Crude ($ per barrel) 39.62 -2.5%
    Gold ($ per ounce) 1,803.55 +1.6%

    Source: Bloomberg, 10 July 2020. Prices close of business July 09, 2020

    Economic calendar

    July 13: Japan tertiary industry index
    July 14: UK trade balance, US CPI, eurozone CPI
    July 15: US industrial production, UK PPI
    July 16: US jobless claims, US retail sales, UK unemployment,
    July 17: US housing starts, eurozone industrial orders

    Week to July 03, 2020
    • In the US, yields rose and the yield curve steepened. Concerns about the strength of the economic recovery and the rising number of new COVID-19 cases across certain US states (particularly in the south and west of the country) has led to some profit-taking in longer-dated bonds. This, in turn, contributed to a mild steepening in the yield curve. Minutes from June’s Federal Open Market Committee meeting, released this week, showed that there was a split between those members advocating, and those arguing against, adopting an explicit yield-curve control policy (a tool which has already been used by both the Bank of Japan and the Reserve Bank of Australia). The news disappointed investors, leading to some selling of long positions — especially at the short end of the curve.
    • Germany revises its 2020 funding plans. The German government substantially raised its outlook for bond issuance, guiding to a total gross supply of €90bn, as it seeks to finance the huge monetary support to the economy required because of COVID-19. Yields on 10-year bunds rose as selling pressure appeared mid-week.
    • 30-year gilt yields fell below the yields of 30-year Japanese government bonds for the first time. Long-dated UK bond yields have fallen below those of Japan as the yield on 30-year Japanese government bonds continued to rise (see graphic). This continues a trend whereby the UK yield curve has shifted downwards, with short-dated paper yielding negative rates. Additionally, the UK government announced it would borrow a further £50bn in August. This will bring the total borrowing for the five months to August to £275bn.
    • High-yield bonds rallied in Europe and the UK, as dividend payments continued to fall. Yields in high-yield bonds fell further, continuing a trend seen over the past few months, as investors search for yield. The widespread cuts in dividends from many companies, exemplified by Royal Dutch Shell’s recent reduction, have seen investors seek yield in riskier parts of the bond market.
    • Credit-market performance was broadly positive. In the US, sentiment was affected by pauses in easing virus-containment measures, raising some concerns about a slowing economic recovery. Attention will soon turn to earnings, with expectations of a material decline. New issuance was light given the holiday weekend, though Takeda Pharmaceutical did issue bonds. In European credit, the market tone became more positive. After some large deals (from Takeda and Bayer) had cleared in the primary market, dealers began to bid for secondary paper. Bank bond yields tightened, but later in the week some higher-beta corporates, such as autos and corporate hybrids, also began to rally.

    Chart of the Week: 30-year gilt yields dip below 30-year JGBs for the first time

    Chart of the Week- US Treasury yield curve flattened sharply

    Source: Bloomberg as at 03 July 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 144bp -9
    Bloomberg Barclays Euro Corporate Index 145bp -4
    Bloomberg Barclays Sterling Non Gilts Index 143bp -3
    Bloomberg Barclays US Corporate High Yield Index 600bp -15
    Bloomberg Barclays Pan-European High Yield Index 503bp -9
    Bond yields (10yr)
    USA 0.67% +3
    Germany -0.43% +5
    Japan 0.04% +2
    UK 0.19% +1
    EquitiesWeek-to-date change
    S&P 500 3,130 +4.0%
    DJ Euro Stoxx 50 3,320 +3.6%
    FTSE 100 6,240 +1.3%
    DAX 12,608 +4.3%
    Nikkei 225 22,146 -1.6%
    Currencies
    EUR/USD 1.12 +0.1%
    JPY/USD 107.59 -0.3%
    GBP/USD 1.25 +1.0%
    Commodities
    Brent Crude ($ per barrel) 43.14 +5.2%
    WTI Crude ($ per barrel) 40.65 +5.6%
    Gold ($ per ounce) 1,776.83 +0.3%

    Source: Bloomberg, 03 July 2020. Prices close of business July 02, 2020

    Economic calendar

    July 06: US composite PMI, eurozone retail sales
    July 07: Japan leading economic index, eurozone industrial production
    July 08: Japan machinery orders
    July 09: US initial jobless claims
    July 10: US producer price index

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