United States
March 24, 2023
Fixed income
Week to March 24, 2023
- Federal Reserve raises interest rates by a further ¼%. Another rate increase by US policymakers took the Fed Funds rate to a range of 4.75-5.00% – its highest level since September 2007 – and marked the ninth consecutive hike. The tone of Fed Chair Jerome Powell’s accompanying statement was more dovish than in recent months. Instead of reiterating the need for further rate hikes, Powell said that “some additional policy firming may be appropriate”. While he reaffirmed the Fed’s determination to bring inflation back under control, he also suggested that the recent banking sector upheaval will probably lead to more rigorous assessment from banks on lending which, in turn, could restrict both growth and inflation. While referring to the US banking system as “sound and resilient”, he conceded that the recent turmoil in the banking sector may negatively affect economic growth. The Fed downgraded its outlook to 0.4% for this year and 1.2% for 2024. The market currently gives no more than a 50% chance of a further rate hike in May, while there appears to be a growing opinion the Fed to be cutting rates by year end.
- Global bond yields remain volatile after last week’s banking sector turmoil. Investors were reassured by the responsiveness of the banking authorities to stabilize the financial system and the speed of the UBS takeover of Credit Suisse, but concerns remain about the financial viability of some banks and the potential for further US regional bank failures. There was some lingering shock at the events, especially the wipe-out of Credit Suisse’s AT1 (Additional Tier 1) bond holders, even though shareholders received some compensation. The European Central Bank (ECB) and BoE reassured investors that this principle would not apply in any bank failures in their region. The 10-year US Treasury yield approached its lowest for six months below 3.4%. However, in the Eurozone, 10-year government yields increased during the early part of the week, but the tone reversed sharply on Friday. There were also rate hikes from other central banks, including those in Switzerland, Norway and Taiwan.
- Corporate bonds gain reassurance from global banking authorities’ measures. In the aftermath of the UBS purchase of Credit Suisse, and US banking authorities appearing to suggest that all bank depositors would be protected, corporate bond spreads narrowed, and credit default swap (CDS) prices fell. However, by the end of the week, renewed concerns about the state of banks in the US and Europe saw spreads widen and CDS prices rise again.
- Municipal bond update. At the front end, tax-exempt munis underperformed Treasuries but modestly outperformed in intermediate and longer maturities. High grade muni yields declined by 4bp at the front end, moved lower by 2bp in five- and 10-years, and were unchanged at the long end. Muni to Treasury yield ratios increased in five years and were largely unchanged for intermediate and long maturities. Weekly reporting muni mutual funds experienced US$427m outflows except for ETFs which saw small inflows. It was a quiet week overall. Prepaid gas bonds had a firmer tone as buyers emerged. Next week’s calendar of new issues is modest again at just over US$4bn negotiated. Ten-year tax-exempt munis are now yielding around 2.36 % and 10-year taxable munis are yielding around 4.45%.
- UK inflation unexpectedly rises in February prompting the Bank of England (BoE) to raise rates again. The BoE raised interest rates by 25bp as expected, which took the benchmark rate to 4.25%. The move followed the inflation report in which headline annual inflation unexpectedly rose to 10.4%, largely due to rising food prices; fresh food and non-alcoholic drinks together rose by 18% year on year. The move contrasts with softening pricing pressures in the US and the eurozone.
- Japanese inflation eases to 3.3% in February. The lowest inflation rate in five months was largely in line with market expectations, reflected falling utility and fuel costs although food prices rose by the most in 43 years – up 7.5% year on year. On a monthly basis, headline inflation declined by 0.6%, marking the first fall since October 2021. The 10-year Japanese government bond was largely unchanged over the week.
Source: Bloomberg, March 24, 2023. Prices close of business March 23, 2023.
Economic calendar
27 Mar: BoE Governor Bailey’s speech, Germany IFO business climate, Japan leading economic index.
28 Mar: US consumer confidence, UK BRC shop prices.
29 Mar: UK consumer credit, US home sales.
30 Mar: Eurozone consumer confidence and economic sentiment, Germany CPI, US initial jobless claims.
31 Mar: Eurozone CPI, US PCE, Germany retail sales, UK Q4 (final) GDP.
Week to March 17, 2023
- Sovereign yields plummet as SVB Financial and Signature Bank collapse. Sovereign bond markets rallied, and corporate bond markets suffered as sentiment towards the global economy deteriorated in the light of the SVB Financial and Signature Bank bankruptcies, with questions surrounding the implications for other financial institutions. Yields fell across sovereigns as investors began inferring that the Federal Reserve and other major global banks could soften their monetary stance as the market mood towards risk assets darkened. The two-year Treasury yield dropped approximately 60bp (the largest daily drop since October 1982) to just over 4.0% on Monday, leading to a substantial steepening of the yield curve as longer-dated bond yields fell only moderately. The German two-year Bund yield also fell dramatically by almost 50bp, the steepest drop for 33 years. Rating agencies downgraded the debt of Signature Bank to junk, with several other US banks placed on the watchlist, pending possible downgrades. As a result, there were growing hopes that the Fed might delay its planned rate hike next week following its Federal Open Market Committee meeting. However, by the end of the week, yields across global bond markets recovered somewhat.
- Corporate bond spreads widen. Following the collapse of two banks in the US and European banking sectors turmoil centered on Credit Suisse, spreads between corporate and government bond yields widened dramatically. At the same time, the cost of insuring against credit-related events through credit default swaps (CDS) shot up. Spreads widened in lower-risk or investment-grade bonds but much more so in higher-risk paper. In the US, the CDS index for investment grade bonds rose towards 100bp, its highest level for four months, reflecting fears of contagion from the US bank bankruptcies. In Europe, the spread on the iTraxx European Crossover index, which reflects the cost of insuring junk bonds, surged. However, the spreads had contracted a little towards the end of the week as the banking authorities in the US reassured markets about their support for distressed lenders. Additionally, the Swiss authorities offered Credit Suisse a CHF50bn loan facility, which helped the mood in markets.
- US inflation falls further in February. Annual headline inflation in the US dropped to 6.0% from 6.4% in January, marking the eighth successive month it has fallen from its 9.1% peak in June 2022. Energy costs, especially petrol, continued to drive headline inflation lower. However, core inflation (excluding food and energy costs) was little changed, declining 10bp to 5.5% from January’s 5.6% and rising 0.5% over the month, largely due to higher-than-expected shelter costs.
- The European Central Bank (ECB) hikes rates by 50bp. The ECB pressed on and raised interest rates, despite the turmoil affecting markets, which had led some investors to believe the central bank might raise rates by only 25bp or even delay a hike. It also revised its forecast for core inflation upwards to an average rate of 4.6% for 2023 and upgraded its GDP forecast for this year to 1%. However, ECB President Christine Lagarde abandoned specific guidance on interest rates and stated that further rate changes would be “data-dependent”. As a result, expectations on peak rates eased, with current market forecasts for the ECB deposit rate falling to around 3.5%, down from 4.0% just over a week ago.
- Tax-exempt munis modestly outperform US Treasuries. Tax-exempt munis modestly outperformed Treasuries this week. High grade muni yields declined by 27bp at the front end, moved lower by 24bp and 16bps in 5 years and 10 years, respectively, and declined by 6bp at the long end. Muni to Treasury yield ratios fell 1 to 2 ratios. Overall, weekly muni mutual funds experienced outflows of $461m except for high yield funds, which saw inflows of $301m. ETFs experienced minor outflows. This week’s new issue calendar saw good demand. In secondary markets, municipal prepaid gas bonds backed by financial institutions experienced weakness, with bonds supported by Goldman Sachs, Morgan Stanley, and Citi off 60bp for the week and put bonds spread at 200 to 220bp off. The upcoming calendar is roughly $4-5 billion, including a $1.5 billion taxable muni Louisiana Utilities Restoration Corp financing rated Aaa/AAA. Ten-year tax-exempt munis are now yielding around a 2.38 % and 10-year taxable munis are yielding around a 4.55%.
Source: Bloomberg, March 17, 2023. Prices close of business March 16, 2023.
Economic calendar
20 Mar: Eurozone trade balance, German PPI.
21 Mar: UK Public sector net borrowing, eurozone economic sentiment.
22 Mar: Fed interest rate decision, UK CPI, PPI and RPI.
23 Mar: BoE interest rate decision, US new home sales and initial jobless claims.
24 Mar: UK retail sales, US durable goods, UK, US and eurozone flash PMIs.
Week to March 10, 2023
- Federal Reserve reaffirms the case for tight monetary policy. In testimony to Congress, Fed Chair Jerome Powell was adamant that the battle against inflation was far from won. He admitted the Fed had been surprised by the strength of recent economic data and that to bring inflation back under control, rates may need rise above current market forecasts. “The ultimate level of interest rates is likely to be higher than previously anticipated,” he said. The 10-year Treasury yield touched 4% following his speech, while the two-year yield broke above 5% for the first time in 16 years. This left the inversion between 10-year and two-year bonds at over 100bp, its highest negative spread in 41 years. Yields eased a little in the latter half of the week, as Powell appeared slightly more dovish on the second day of his testimony. Nevertheless, the odds on a 50bp hike this month have hardened, with consensus expectations hovering at just above 40bp from 25bp a few weeks ago. Yields, however, eased after Powell appeared slightly more dovish on the second day of his testimony and initial jobless claims rose. The 10-year Treasury yield ended down over the week, falling to 3.83%.
- Tax-exempt munis perform in line with Treasuries. High grade muni yields declined by 8bp in the front end moved lower by 4 bp at 5 years and declined 2bp at 10 years and longer. Muni to Treasury yield ratios were flat in 5 and 10 years at 62% and 66%, respectively, and rose to 93% in thirty years. Overall, weekly muni mutual funds experienced outflows of $308 million while ETFs had minor inflow activity. This week's issuance focused on two large taxable bonds deals, the $3.5bn TX Nat Gas Securitization and $1.8bn CA GO issuance saw intense demand. Ten-year tax-exempt munis are now yielding around 2.62%, while 10-year taxable munis are yielding around a 4.92%.
- The European Central Bank (ECB) warns of higher rates. ECB President Christine Lagarde and some other senior ECB members agreed that the market should expect further hikes in interest rates. Describing inflation as a “monster” that needs to be “knocked on the head”, Lagarde was at pains in an interview during the week to state that inflation was too high, and that further rate hikes were essential. Indeed, with core inflation rising to a new record high last month of 5.6%, expectations of peak rates in the eurozone have risen to above 4%. Eurozone bond yields climbed, especially at the short end. The German two-year bond yield rose above 3.3%, its highest level for 15 years, taking the inversion with 10-year Bund yields to nearly 70bp, its most inverted for over 30 years and approximately double the level of a month ago. Yields declined a little later in the week on a favorable ECB inflation survey which showed consumer expectations of inflation in January beginning to fall.
- UK gilts outperform. Gilts fell after comments from Andrew Bailey governor of the Bank of England (BoE) last week that suggested the outlook for rates was largely undecided. The 10-year bond yield fell 5bp over the week to 3.8%. While annual inflation is just above 10%, the BoE forecasts that it will drop below 4% by the end of the year. With UK Chancellor Jeremy Hunt expected to announce a fiscally tight budget next week, investor concerns may focus more on the economic outlook than inflation, which may further support gilts.
- Canada held rates steady. The Bank of Canada (BoC) paused its interest rate tightening in March, becoming the first major central bank to do so this cycle. It left rates at 4.5%, which followed hikes of 25bp in January and 50bp in December. The BoC had communicated its intentions to pause its rate hikes back in January and with inflation expected to continue to fall, the central bank said it would likely keep rates steady going forward, subject to economic data. However, the market is still pricing in a further rise of 25bp by September.
- Australia raised interest rates by a further 25bp. The Reserve Bank of Australia increased its benchmark interest rate to 3.6%, the tenth successive hike since last May, and its highest level in over 10 years. While there have been some recent indications that inflation is peaking, the central bank is naturally cautious and stated that it would need to consider forthcoming data carefully.
Source: Bloomberg, March 10, 2023. Prices close of business March 09, 2023.
Economic calendar
14 Mar: US CPI, UK unemployment.
15 Mar: US PPI and retail sales, eurozone industrial production, China industrial production and retail sales.
16 Mar: ECB interest rate decision, US housing starts and initial jobless claims, Japan industrial production.
17 Mar: Eurozone CPI, US industrial production and consumer sentiment index.
Week to March 03, 2023
- The worst February for bond markets in decades: Global government bond markets continued to sell off, which culminated in last month representing the worst February for bond performance since 1981. US Treasury yields had been rising for most of February and moved even higher partly in reaction to last Friday’s US core personal consumption expenditure index, which was stronger than markets expected. As March began, the 10-year US Treasury yields broke through 4%, its highest level since November, while the two-year yield hit a 16-year high of 4.9%, taking the curve spread to its most inverted point this cycle and a multi-decade low of almost 90 basis points (bp). There market has not ruled out the potential for a 50bp rate increase in March.
- Municipal bond update.Tax-exempt munis outperformed Treasuries, though yields increased across the curve during a volatile week. Muni to Treasury yield ratios fell modestly across the curve (62% in five-year, 65% in 10-year, 90% in 30-year) and the curve remains inverted. Mutual fund flows were once again negative with US$905m exiting. The 10-year to 15-year part of the curve attracted the most investor interest due its relative steepness, while demand was weak for five-year bonds. Next week’s calendar is concentrated in two very large taxable muni deals, a US$3.5bn issue from a Texas issuer and a US$1.8bn California GO issue expected. Ten-year tax-exempt munis are now yielding around 2.63% and 10-year taxable munis are yielding around 4.97%.
- Eurozone inflation falls further in February: Eurozone headline inflation rate fell modestly to 8.5% from January’s 8.6%, the fourth month in succession that the rate has fallen. However, it remained above consensus expectations. While the pace of energy prices declined, food price inflation accelerated. There had been concerns earlier in the week as inflation in both France and Spain had reaccelerated in February. European Central Bank (ECB) Chief Economist Philip Lane had suggested that inflationary pressure was moderating across the eurozone, and although interest rates were likely to rise further, he was confident that the medicine of tighter rates was having an effect. Despite this, recent hawkish comments from some ECB policymakers, has suggested monetary policy would need to remain tighter for longer than the market expects. The market is currently discounting another 50bp rate increase from the ECB this month. The German 10-year bund yield climbed above 2.7% (its highest level since 2011) while the two-year yield rose to 3.2%, the highest for more than 14 years. Eurozone inflation figure fell marginally and by less than expected, to 8.5%.
- UK food prices rise at record pace: Grocery prices at UK stores surged by 17.1% in the month to 19 February, setting a new record since data was first compiled in 2008, according to figures from market research company Kantar. Food price inflation has accelerated markedly over the past year, while some items of fresh produce have become scarcer or are being rationed at some stores. The BRC-Nielsen Shop Price Index showed a similar surge in food prices, with total shop price inflation hitting a new record high of 8.4% in February, up from 8% in January; within that, food prices grew by 14.5%.
- Bank of England (BoE) Governor strikes a moderate tone on interest rates: In a speech during the week, BoE Governor, Andrew Bailey, suggested that the UK could be close to the end of its tightening phase. In stark contrast with the more hawkish tone prevailing in other markets, Bailey appeared to be more sanguine on the outlook for UK interest rates, stating that further rate hikes were not inevitable, but also making it apparent that nothing was settled yet. This partly reflects the view that there will be relief for UK households in the coming months from falling energy bills as the recent drop in natural gas and oil prices begins to become more apparent, and that this will lead to a steady fall in headline inflation. While bond yields in the UK fell a little and sterling weakened on Bailey’s remarks, yields rose substantially over the week, with the 10-year gilt yield climbing to 3.88%, its highest level since October.
- China’s manufacturing sector begins to boom: Data released by the National Bureau of Statistics of China, showed the economy may be rapidly benefiting from the abandonment of the country’s zero-COVID policy restrictions. The Manufacturing Purchasing Managers Index increased to 52.6 in February, a marked jump from 50.1, and the strongest reading since April 2012. However, the input cost component rose for the sixth month in a row, while output charges also increased, for the first time in 10 months.
Source: Bloomberg, March 03, 2023. Prices close of business March 02, 2023.
Economic calendar
06 Mar: US factory orders, Eurozone retail sales.
07 Mar: China trade data, UK Halifax house prices, US Fed Chair Powell semi-annual Senate testimony.
08 Mar: Japan current account, Eurozone Q4 22 GDP, US balance of trade.
09 Mar: China inflation, Japan Q4 22 GDP (final).
10 Mar: US non-farm payrolls and avg hourly earnings, Japan BoJ interest rate policy decision, UK industrial and manufacturing production.
