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    Weekly fixed income review: June

    Weekly fixed income review: June

    June 18, 2021 Fixed income
    Week to June 18, 2021
    • The US Federal Reserve (Fed) shortened its timetable for a tightening of monetary policy. At its Federal Open Market Committee (FOMC) meeting, it altered guidance on interest rate increases from the previous guidance of a first hike “not before 2024” to one of potentially two rises in 2023. This reflected the recognition of a much-improved economic outlook, largely owing to the successful rollout of COVID-19 vaccines. It led Fed Chairman Jerome Powell to state that “inflation could turn out to be higher and more persistent than we expect”, which marks a change in tone compared with recent statements, and an acknowledgement that inflationary pressures might not all be transitory. There was no official guidance about a potential tapering of the Fed’s bond-purchasing scheme, as had been expected by the market, other than to say that it had been discussed but would not necessarily be considered at every future meeting. Additionally, the Fed revised its economic outlook. It now expects US annual GDP to rise by 7.0% this year, compared to the previous estimate of 6.5%, while the 2022 forecast remains at 3.3%. Meanwhile, annual headline inflation is expected to hit 3.4% this year (up from the Fed’s previous projection of 2.4% in March). Treasury yields and the US dollar both rose on the news, with the 10-year Treasury yield registering its largest daily rise since March.

    • UK inflation rose further in May. Consumer price inflation increased by 2.1% year on year, up from April’s 1.5% growth rate, and ahead of both market expectations and the Bank of England’s 2.0% target. This was the highest growth rate since July 2019 and reflected rising prices for discretionary items, such as clothing and footwear, as well as base effects given May 2020’s weak inflation print. Annual core inflation rose 2.0%, compared to April’s 1.3% increase. Additionally, average wages, including bonuses, increased by 5.6% year on year in April, the largest rise for 14 years, while unemployment fell to 4.7% in the three months to April (down from 4.8% in the three months to March). The UK 10-year gilt yield gently rose through the week, before jumping higher, above 0.80%, on the release of the Fed’s statement.

    • The EU’s bond issue was met with strong demand. The EU launched the first tranche of bond issues related to its Pandemic Emergency Purchase Program. The ‘AAA’-rated, 10-year €20bn bond issue, the largest ever for institutional investors, was met with very strong demand of over €140bn and produced an average yield of 0.086%. Investors were attracted both by the quality of the bond and its relatively high yield relative to the negative rates on offer in countries such as Germany and Switzerland. The EU will issue €800bn in total over the next five-and-a-half years to cover the costs of its program. Eurozone bond yields climbed, and spreads widened, on the news coming out of the Fed’s policy meeting.

    • Russia raised interest rates. The Central Bank of Russia raised its benchmark policy rate by 0.5% to 5.5%, the second rate hike in two months, and third this year, as inflationary pressures from rising commodity prices and the recovering economy continue to build. Annual consumer price inflation hit 6.0% in May, the highest level in almost five years.

    Chart of the Week: the 10-year Treasury yield ended the week slightly higher after the Fed meeting (%)

    Chart of the Week: US consumer price inflation reaches its highest level in 13 years (%)

    Source: Bloomberg. Data as of June 18, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 82bp -2
    Bloomberg Barclays Euro Corporate Index 83bp 0
    Bloomberg Barclays Sterling Non Gilts Index 90bp -1
    Bloomberg Barclays US Corporate High Yield Index 284bp -6
    Bloomberg Barclays Pan-European High Yield Index 284bp +4
    Bond yields (10yr)
    USA 1.50% +5
    Germany -0.20% +8
    Japan 0.06% +3
    1UK 0.78% +7
    EquitiesWeek-to-date change
    S&P 500 4,222 -0.6%
    DJ Euro Stoxx 50 4,158 0.8%
    FTSE 100 7,153 0.3%


    Nikkei 225 29,018 0.2%
    EUR/USD 1.19 -1.7%
    JPY/USD 110.21 -0.5%
    GBP/USD 1.39 -1.3%
    Brent Crude ($ per barrel) 73.08 +0.5%
    WTI Crude ($ per barrel) 71.04 +0.2%
    Gold ($ per ounce) 1,773.50 -5.5%

    Source: Bloomberg, June 18, 2021. Prices close of business June 17, 2021.

    Economic calendar

    21 June: US Chicago Fed national activity index
    22 June: UK public sector borrowing, US existing home sales, eurozone consumer confidence
    23 June: US, UK, and eurozone PMIs, Japan leading economic index
    24 June: US durable goods orders, US initial jobless claims, Japan CPI
    25 June: US Michigan consumer sentiment

    Week to June 11, 2021
    • US inflation rose at its highest pace for nearly 13 years over the year to May. The consumer price index increased by 5.0% year-on-year, the largest rise since August 2008. Steeply rising commodity prices, supply-chain disruptions, strong wage growth and increased consumer demand were all factors behind the rise, while base effects continued to play their part. Annual core inflation climbed by 3.8%, the biggest increase since 1992. However, the market reaction was subdued, with equities rising, the 10-year Treasury yield remaining largely unchanged, and the yield curve (two- to 10-year yields) flattening. This increase in price levels is likely to be the focus of the Federal Reserve meeting next week.

    • Global bond yields fell over the week. During week the 10-year US Treasury yield fell to its lowest level for three months, dropping below 1.5%. The UK and European bond markets also rallied as markets took a sanguine view on recently released economic data that, overall, continued to support the notion of recovery. US Treasury Secretary Janet Yellen commented earlier in the week that current inflationary pressures are likely driven by temporary rather than enduring factors, highlighting bottlenecks in supply chains which would likely ease longer term.

    • The European Central Bank (ECB) governing council pledged to accelerate quantitative easing and raised its economic and inflation forecasts. The central bank committed to continuing with its asset-purchase scheme over the next quarter “at a significantly higher pace than during the first months of the year”. ECB President Christine Lagarde stated that it was the council’s belief that the factors currently driving inflation higher would ease next year. At the same time, the ECB raised its forecasts for eurozone economic growth from 4.0% to 4.6% this year and increased its estimates of annual consumer inflation from 1.5% to 1.9% for 2021.

    • UK retail sales rose at a double-digit pace in May. According to figures from the British Retail Association, retail sales climbed by 10% year-on-year in May, the highest rate of growth since COVID-19 hit the UK early last year. Bank of England Chief Economist Andy Haldane again cautioned on the inflation risks in the UK economy, stating in a speech during the week that the current juncture was “the most dangerous moment for monetary policy since inflation-targeting was first introduced into the UK in 1992”. He again argued for a reduction in the central bank’s current stimulus program, in particular warning of a potentially dangerous inflationary wage spiral. GDP continued to recover, with April showing an increase of 2.3% month-on-month, the fastest rate of growth since last July.

    • Inflationary pressures were evident in China as both the producer price and consumer price indices rose further.Producer, or factory gate, prices rose at their highest rate for more than 12 years, climbing by 9.0% on an annual basis, reflecting increasing raw material and commodity costs. Consumer prices rose 1.3% year-on-year in May, the highest rate in eight months, albeit lower than had been forecast. However, it marked the fourth consecutive month that the annual inflation rate had picked up over the preceding month.

    Chart of the Week: US consumer price inflation reaches its highest level in 13 years (%) 

    Chart of the Week: US consumer price inflation reaches its highest level in 13 years (%)

    Source: Bloomberg. Data as of June 11, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 85bp 0
    Bloomberg Barclays Euro Corporate Index 84bp -1
    Bloomberg Barclays Sterling Non Gilts Index 91bp -1
    Bloomberg Barclays US Corporate High Yield Index 291bp -6
    Bloomberg Barclays Pan-European High Yield Index 282bp -4
    Bond yields (10yr)
    USA 1.43% -12
    Germany -0.26% -4
    Japan 0.06% -3
    1UK 0.75% -4
    EquitiesWeek-to-date change
    S&P 500 4,239 0.2%
    DJ Euro Stoxx 50 4,096 0.2%
    FTSE 100 7,088 0.3%


    Nikkei 225 28,959 0.1%
    EUR/USD 1.22 0.0%
    JPY/USD 109.33 0.2%
    GBP/USD 1.42 0.1%
    Brent Crude ($ per barrel) 72.52 +0.9%
    WTI Crude ($ per barrel) 70.29 +1.0%
    Gold ($ per ounce) 1,898.51 +0.4%

    Source: Bloomberg, June 11, 2021. Prices close of business June 10, 2021.

    Economic calendar

    June 14: Japan and eurozone industrial production
    June 15: UK unemployment, US PPI, US retail sales, US industrial production
    June 16: UK CPI and PPI, US housing starts, US FOMC economic projections
    June 17: Eurozone CPI, US initial jobless claims
    June 18: Japan CPI, UK retail sales

    Week to June 04, 2021
    • The OECD raised its forecasts for economic growth. The institution now expects global economic growth to rise 5.8% in 2021, up from its previous estimate 5.6%. It expects 4.4% growth in 2022, up from its previous forecast of 4.0%. This follows the accelerating rollout of COVID-19 vaccinations across the world, as well as the rising fiscal stimulus figures pledged by the Biden administration. The US growth forecast was raised from 6.5% to 6.9% while the UK was seen as having the highest growth rate of any major developed economy in 2021, of 7.2%, up from the previous forecast of 5.1%.

    • The US Federal Reserve’s (Fed) reports rising inflationary pressures in the US economy. The Fed's Beige Book report, covering the period through much of April and May, concluded that selling prices “increased moderately” and input costs climbed “more briskly”. This seems to imply that companies are absorbing some of the increased pricing pressure, at least for now, although the expectation is that this will gradually change as demand rises. The US government bond market was relatively steady over the week, with the 10-year Treasury yield largely unchanged at approximately 1.6%. There was moderate new issuance including Citi, Athene, Videotron, Vodafone, and Petrobras.

    • Eurozone inflation rose to its highest level since October 2018. Consumer price inflation rose by 2.0% year on year in May, a little higher than expected, and above the European Central Bank’s inflation target for the first time in 31 months. A rise in energy costs was a key factor in the rise as annual core inflation, which excludes energy and food prices rose from 0.7% in April to 0.9% in May. Additionally, eurozone producer prices surged by 7.6% year on year in April, the highest growth rate since September 2008. Government bond yields were largely unchanged on the news as investors appeared to take the figures in their stride, seemingly placated by recent central bank statements suggesting that the current rise in inflation reflected temporary factors.

    Chart of the Week: Eurozone inflation bounces back

    Chart of the Week: Eurozone inflation bounces back

    Source: Bloomberg. Data as of June 04, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 85bp +1
    Bloomberg Barclays Euro Corporate Index 85bp 0
    Bloomberg Barclays Sterling Non Gilts Index 92bp 0
    Bloomberg Barclays US Corporate High Yield Index 295bp -1
    Bloomberg Barclays Pan-European High Yield Index 286bp -6
    Bond yields (10yr)
    USA 1.63% +3
    Germany -0.18% 0
    Japan 0.08% +0
    1UK 0.84% +5
    EquitiesWeek-to-date change
    S&P 500 4,193 -0.3%
    DJ Euro Stoxx 50 4,079 0.2%
    FTSE 100 7,064 0.6%


    Nikkei 225 29,058 -0.3%
    EUR/USD 1.21 -0.5%
    JPY/USD 110.29 -0.4%
    GBP/USD 1.41 -0.6%
    Brent Crude ($ per barrel) 71.31 +2.4%
    WTI Crude ($ per barrel) 68.81 +3.8%
    Gold ($ per ounce) 1,870.76 -1.7%

    Source: Bloomberg, June 04, 2021. Prices close of business June 03, 2021.

    Economic calendar

    7 June: Eurozone investor confidence, Japan leading economic index, German factory orders
    8 June: UK retail sales, US business optimism, eurozone economic sentiment, German industrial production
    9 June: China CPI and PPI
    10 June: US CPI, US initial jobless claims, Japan PPI
    11 June: UK trade balance, UK industrial production, US Michigan consumer sentiment

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