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    Weekly fixed income review: June

    Weekly fixed income review: June

    June 26, 2020 Fixed income
    Week to June 26, 2020
    • Treasury yields were stable over the week, despite a record auction of short-term bonds. $46bn-worth of 2-year bonds were auctioned off by the Federal Reserve – a record level. Yields on 2-year bonds fell to a low of 0.18%. Faced with continuing economic uncertainty, fears around a resurgence in new cases of Covid-19, and the support offered by the Federal Reserve’s massive liquidity programme, investor demand was strong. Rates on the 10-year bonds remained steady at approximately 0.7%
    • Confidence in German economic recovery rises. The release of June’s IFO Business Climate index, which indicated a further recovery in business confidence in Germany, saw German yields rise to their highest level for some weeks. The IFO index climbed to 86.2 from 79.5 in May. Also, 10-year bund yields touched -0.39% as sellers were to the fore early in the week, before ending the week lower at -0.47.
    • The Austrian government sold a 100-year bond. Austria raised €2bn from a bond issuance, expiring in July 2120, with a yield of 0.88%. It had previously sold a 100-year bond to the markets in 2017. The issue attracted strong demand (almost nine times covered) owing to both its relatively high yield and the strong credit rating of Austria.
    • A flight to safety was witnessed in the UK. Yields on short-dated bonds – 5-year and 2-year paper – touched record lows as investors sought safe-havens and shunned riskier assets, at a time when GDP forecasts from institutions such as the IMF worsened. Concern over the Bank of England’s intention to slow the pace of its corporate bond-purchasing programme also unsettled investors (despite an increase in its overall size from £645bn to £745bn) and drove them into less risky instruments; 5-year yields fell into negative territory, falling to -0.06% before recovering slightly.
    • Yields on long-dated bonds in Japan have risen to their highest level for over a year. The yield on the 40-year government bond rose to just over 0.6%, while that on the 30-year government bond rose to 0.575%, leading to a gentle steepening of the yield curve, as short rates remained steady. Yields have risen as investors mull over record forthcoming debt issuance levels from the Japanese government.
    • Corporate spreads widened 6bp to 145bp as concerns about the rising number of cases of COVID-19 in the south and west of the US increased fears that the easing of lockdown restrictions might be partially reversed. The Fed has begun to buy individual corporate bonds, leading to better performance at the front end of the curve. New issuance slowed going into the results season, but Teck Resources, American Airlines, Xylem, and Total all issued.

    Chart of the Week: 5-year and 10-year UK gilt yields (%)

    Chart of the Week- US Treasury yield curve flattened sharply

    Source: Bloomberg as at 26 June 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 152bp +6
    Bloomberg Barclays Euro Corporate Index 149bp +6
    Bloomberg Barclays Sterling Non Gilts Index 147bp +1
    Bloomberg Barclays US Corporate High Yield Index 605bp +27
    Bloomberg Barclays Pan-European High Yield Index 513bp +17
    Bond yields (10yr)
    USA 0.69% -1
    Germany -0.47% -5
    Japan 0.02% 0
    UK 0.15% -8
    EquitiesWeek-to-date change
    S&P 500 3,084 -0.5%
    DJ Euro Stoxx 50 3,219 -1.5%
    FTSE 100 6,147 -2.3%
    DAX 12,178 -1.2%
    Nikkei 225 22,260 -1.0%
    Currencies
    EUR/USD 1.12 +0.4%
    JPY/USD 107.19 -0.3%
    GBP/USD 1.24 +0.6%
    Commodities
    Brent Crude ($ per barrel) 41.05 -2.7%
    WTI Crude ($ per barrel) 38.72 -2.6%
    Gold ($ per ounce) 1,763.79 +1.1%

    Source: Bloomberg, 26 June 2020. Prices close of business June 25, 2020

    Economic calendar

    June 29: Eurozone consumer price index, eurozone economic sentiment indicator
    June 30: UK and eurozone first-quarter GDP, US consumer confidence, Japanese Tankan survey
    July 01: US ISM manufacturing index
    July 02: US trade balance, US non-farm payrolls, UK consumer confidence
    July 03: Eurozone services and composite PMI

    Week to June 19, 2020
    • Both bond and equity markets were boosted by the Federal Reserve (Fed)’s announcement that it would immediately start purchasing individual corporate bonds, as opposed to the previous policy of buying just corporate bond exchange-traded funds, as part of its wider strategy of supporting asset prices during the current pandemic.
    • Corporate spreads tightened as the Fed officially launched its program to purchase individual corporate bonds. The market has largely discounted a rise in the number of new COVID-19 cases in parts of the US, thanks to continued policy easing. New issuance has remained high, with deals from Pacific Gas & Electric, General Motors, Carrier, and Upjohn. In European credit, the market was softer this week as spreads gently widened. The primary issuance market was very busy, with several billion euros-worth of deals.
    • The US government is considering a $1trn infrastructure fund. This spending, if approved, would provide a much-needed upgrade to the US’s aging bridges, roads and buildings, and help support the economy. It would, of course, lead to further heavy issuance of Treasuries, as well as an increase in the Fed’s balance sheet as it mops up excess bond supply. Treasury yields, which climbed on market optimism, declined later in the week on fears of a second COVID-19 wave, ending the week flat (see Chart below).
    • The Bank of England (BoE) increased its bond-purchasing programme by a further £100bn. The BoE’s Monetary Policy Committee decided to extend its budget for government and corporate bond purchases, while also discussing other potential quantitative easing measures. While the overall budget was increased, the market was somewhat disappointed that the daily level of purchasing would almost halve to £6.9bn from £13.5bn. The BoE kept interest rates unchanged at 0.1%.
    • The German government returned to the market, with another substantial issue, following last week’s record tap. Germany launched a further €5bn long-term bond issue through auction as it raises money to fund its large fiscal program.
    • The Bank of Japan has raised its Covid-19-related spending programme to $1trn. In raising the budget by around 45%, Bank of Japan Governor Haruhiko Kuroda emphasised the economic severity facing Japan, and suggested that the current ultra-loose monetary policy could be in place for longer than expected. The announcement caused 10-year Japanese government bond yields to rise marginally although they had settled back to be largely unchanged by the end of the week.

    Chart of the Week: 10-year US Treasury yield (%)

    Chart of the Week- US Treasury yield curve flattened sharply

    Source: Bloomberg as at 19 June 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 147bp -12
    Bloomberg Barclays Euro Corporate Index 142bp -4
    Bloomberg Barclays Sterling Non Gilts Index 145bp -5
    Bloomberg Barclays US Corporate High Yield Index 577bp -34
    Bloomberg Barclays Pan-European High Yield Index 492bp -19
    Bond yields (10yr)
    USA 0.71% +1
    Germany -0.41% +3
    Japan 0.02% +1
    UK 0.23% +2
    EquitiesWeek-to-date change
    S&P 500 3,115 +2.4%
    DJ Euro Stoxx 50 3,250 +3.0%
    FTSE 100 6,224 +1.9%
    DAX 12,282 +2.8%
    Nikkei 225 22,355 +0.2%
    Currencies
    EUR/USD 1.12 -0.5%
    JPY/USD 106.97 +0.4%
    GBP/USD 1.24 -0.9%
    Commodities
    Brent Crude ($ per barrel) 41.55 +7.2%
    WTI Crude ($ per barrel) 38.84 +7.1%
    Gold ($ per ounce) 1,722.93 -0.5%

    Source: Bloomberg, 12 June 2020. Prices close of business June 11, 2020

    Economic calendar

    June 22: UK CBI industrial trends survey, US home sales
    June 23: Eurozone Markit PMI figures, Japan au Jibun Bank manufacturing PMI
    June 24: Japan leading economic index, US housing price index
    June 25: US durable goods, US jobless claims, eurozone consumer confidence survey
    June 26: US Michigan consumer sentiment index

    Week to June 12, 2020
    • The Federal Reserve (Fed) completed its two-day policy meeting. The tone from the Fed was slightly more dovish than expected, with Chairman Jerome Powell forecasting interest rates to stay around zero until the end of 2022, reflecting concerns about the pace of economic recovery from the coronavirus. The Fed also stated that inflation will likely remain below target (2.0%), and revised its estimate for the annual inflation rate to 1.7% by the end of 2022. Powell also committed the Fed to at least matching the current pace of bond purchases for the foreseeable future. The briefing from the Fed boosted bond prices, which had sold off earlier in the week, while further weakening the US dollar.
    • Rise in US job creation against expectations. Non-farm payrolls recovered contrary to expectations, with the creation of 2.51mln jobs in the week ended June 5. This data encouraged a renewed bout of risk-on equity demand, early in the week, although US government bond yields have fallen across the maturity curve.
    • The US subprime ABS market remains underpinned. Spreads between high yield bonds and US Treasuries have narrowed markedly this week, as investors’ risk tolerance has increased. New deals from subprime issuers have met strong demand. Data for April on the delinquency level of subprime debt revealed that there had been no change, implying greater risk tolerance as investors discount a recovering economic backdrop.
    • US credit spreads tightened. However, the picture beneath the headline tightening was more mixed. While spreads rallied hard on the surprisingly strong jobs report, they have since given ground as investors worry about a second virus wave. New issuance had continued to moderate, although both Delta Air Lines and Westlake Chemical issued. European credit spreads started to widen as the week progressed. Sectors that had fared well lately – autos, oil, airlines – gave back some of their recent gains.
    • Peripheral eurozone government bond auctions attracted record demand. Greece, Spain and Ireland all raised money at auction, with very strong demand in evidence. The Irish government raised €6bn through a 10-year bond issue, receiving a record €70bn of orders, implying coverage of over 10 times. The recent announcement of the large extension to the European Central Bank’s bond-purchasing programme has helped to boost demand. Additionally, the issuance by the German government of a 30-year Bund garnered record orders (approximately €31bn). What was effectively a tap of an existing 30-year Bund amounted to €6bn in size, four times greater than any previous 30-year Bund issuance, reflecting strong demand for long-dated German paper.

    Chart of the Week: US Treasury yield curve steepened sharply

    Chart of the Week- US Treasury yield curve flattened sharply

    Source: Bloomberg as at 12 June 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 161bp +15
    Bloomberg Barclays Euro Corporate Index 145bp +13
    Bloomberg Barclays Sterling Non Gilts Index 149bp +2
    Bloomberg Barclays US Corporate High Yield Index 620bp +84
    Bloomberg Barclays Pan-European High Yield Index 513bp +43
    Bond yields (10yr)
    USA 0.67% -23
    Germany -0.41% -14
    Japan 0.01% -4
    UK 0.20% -16
    EquitiesWeek-to-date change
    S&P 500 3,002 -6.0%
    DJ Euro Stoxx 50 3,145 -7.1%
    FTSE 100 6,077 -6.3%
    DAX 11,970 -6.8%
    Nikkei 225 22,473 -1.7%
    Currencies
    EUR/USD 1.13 +0.1%
    JPY/USD 106.87 +2.5%
    GBP/USD 1.26 -0.5%
    Commodities
    Brent Crude ($ per barrel) 38.55 -8.9%
    WTI Crude ($ per barrel) 36.34 -8.1%
    Gold ($ per ounce) 1,727.70 +2.5%

    Source: Bloomberg, 12 June 2020. Prices close of business June 11, 2020

    Economic calendar

    June 15: China retail sales, industrial production
    June 16: Australia RBA minutes; Germany harmonized index of consumer prices; UK ILO unemployment rate
    June 17: UK CPI; Canada CPI
    June 18: Australia employment data; Switzerland SNB interest-rate decision
    June 19: UK retail sales; Canada retail sales

    Week to June 5, 2020
    • Yield curves steepened materially: Long-dated bonds sold off as the risk-on investment climate continued. Notably, 30-year Treasury bonds traded above a three-month high yield of 1.5%. Concerns around the substantial current and future issuance of US Treasuries, resulting from the massive support and stimulus packages announced by the US authorities, have been another factor behind the fall in bond prices. Short-dated bonds also sold off but by less, leading to steepening in the curve (see chart). In Japan, prices of long-dated bonds, such as 30- and 40-year government bonds, fell and yields touched one-year highs as concerns about the high level of debt issuance caused weakness at the long end. Meanwhile, the Bank of Japan kept short rates low as part of its policy of yield management, leading to a steepening of the yield curve. A similar steepening pattern was also evident in German bunds.
    • German bund yields rise: Investors in European bonds witnessed a spike upwards in German bund yields, with the yield on 10-year instruments hitting its highest level since mid-April. An apparent ditching by investors of safer holdings such as German bunds, in favor of riskier assets, seemed to be in play. It coincided with an announcement from the German government of a €130bn fiscal stimulus package, which includes a sizeable VAT cut, with the aim of boosting consumer spending.
    • The European Central Bank (ECB) intends to ramp up bond purchases: The central bank is increasing the limit on its Pandemic Emergency Purchase Program (PEPP) from the current level of €750bn announced in March, by a further €600bn. The PEPP has already committed approximately one third of its original budget and will now extend the period of support until at least June 2021. The firepower of the PEPP has been targeted particularly at Italian bonds, in a controversial ‘socialization’ of eurozone debts. The ECB purchased almost the entire new issuance of Italian debt for April and May, according to statistics released by the central bank. Italian government bond yields fell to their lowest level in two months.
    • Credit markets were strong: In the US, corporate spreads tightened as momentum in the risk-on trade persisted. Continued Federal Reserve support, ECB stimulus, and signs of both increased air traffic and general rising economic activity have given investors cause for optimism. New issuance in corporate bonds moderated somewhat and deals, including those from Cemex, Seagate, and Air Lease, have often been 10 times oversubscribed. In Europe, credit markets also performed well: after a strong start to the week, the ECB’s announcement of additional budget for its bond-purchasing program gave the market a further boost. Spreads tightened across the board and beta compression was in full swing.

    Chart of the Week: US Treasury yield curve steepened sharply

    Chart-of-the-Week-US-Treasury-yield-curve-steepened-sharply

    Source: Bloomberg as at 05 June 2020. 

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 156bp -18
    Bloomberg Barclays Euro Corporate Index 146bp -22
    Bloomberg Barclays Sterling Non Gilts Index 153bp -9
    Bloomberg Barclays US Corporate High Yield Index 568bp -69
    Bloomberg Barclays Pan-European High Yield Index 497bp -52
    Bond yields (10yr)
    USA 0.82% +17
    Germany -0.32% +13
    Japan 0.04% +3
    UK 0.31% +12
    EquitiesWeek-to-date change
    S&P 500 3,112 +2.2%
    DJ Euro Stoxx 50 3,262 +6.9%
    FTSE 100 6,341 +4.4%
    DAX 12,431 +7.3%
    Nikkei 225 22,696 +3.7%
    Currencies
    EUR/USD 1.13 +2.1%
    JPY/USD 109.15 -1.2%
    GBP/USD 1.26 +2.1%
    Commodities
    Brent Crude ($ per barrel) 39.99 +13.2%
    WTI Crude ($ per barrel) 37.41 +5.4%
    Gold ($ per ounce) 1,714.01 -0.9%

    Source: Bloomberg, 05 June 2020. Prices close of business June 4, 2020

    Economic calendar

    June 8: Japan final Q1 GDP; Germany April industrial production
    June 9: Eurozone final Q1 GDP, employment; US April job openings, final April wholesale inventories
    June 10: US Fed monetary policy decision, weekly MBA mortgage applications, May CPI; OECD publishes Economic Outlook; China May CPI, PPI; Japan May PPI, April core machine orders
    June 11: Eurogroup meeting takes place; US May PPI; Bank of France May industry sentiment; Italy April industrial production
    June 12: US preliminary June University of Michigan consumer sentiment index; eurozone April industrial production; UK April GDP; France final May CPI

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