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    Weekly fixed income review: March

    Weekly fixed income review: March

    March 26, 2021 Fixed income
    Week to March 26, 2021
    • US bond yields gently declined over the week as concerns about inflation dissipated in the short term. The fall in Treasury yields was on target to be the largest weekly fall since June of last year. The US bond market was supported by comments from US Federal Reserve Chairman Jerome Powell, testifying to both the House of Representatives Financial Services and Senate Banking committees, in which he suggested “inflation will be neither particularly large nor persistent”. Powell was also upbeat about the outlook for the US economy, saying that the economy had “progressed more quickly than generally expected and looks to be strengthening”. This view was backed up by the release of a strong initial jobless claims figure of 684,000, in the week ending 20 March, the lowest level for a year.

    • A new wave of COVID-19 in Europe caused many countries to tighten lockdown restrictions. Rising cases of new variants of COVID-19 put major European nations, such as Germany and France, on high alert. This, combined with the ongoing sluggish vaccine programme rollout, supported bond markets as expectations grew that an economic recovery could be further delayed. An increase in the level of bond purchases by the European Central Bank (ECB) also supported bonds. Weekly net bond purchases rose to €21bn last week, the highest level since December, as the ECB sought to keep a lid on rising yields levels. This followed concerns in the market that the pace of the ECB’s bond-purchasing programme had slackened in recent weeks. The German 10-year bund yield fell back to five-week lows.

    • UK inflation dropped in February. The annual consumer price inflation rate declined to 0.4% in February, down from January’s 0.7%, as clothing and footwear prices fell at the steepest rate since November 2009. Core inflation, which excludes energy and food prices, also dropped to 0.9%, a six-month low. More positive was the release of the preliminary composite purchasing managers’ index for March which saw a material jump to a seven-month high, with both manufacturing (57.9) )and services (56.8) faring well. UK bond yields drifted lower over the week, with the 10-year gilt yield falling below 0.75%, even though the market continues to expect higher inflation.

    • The Turkish lira, bond and equities markets tumbled as the central bank’s governor was removed. The 10-year government bond yield spiked higher from approximately 14% to over 19% early in the week, before falling back slightly. Turkish President Erdogan fired the head of the Turkish central bank, Naci Agbal, after he had only been in the job for four months, over an apparent disagreement on policy, following Agbal’s decision to raise interest rates by a further 2.0% to 19.0%. President Erdogan had previously demonstrated a preference for rate cuts as a tool to ease inflation. Ratings agencies such as Fitch and Moody’s were considering downgrading Turkey’s sovereign rating. Other emerging market government bond markets also sold off materially, notably Russia and Brazil, following the decision by both countries’ central banks to raise interest rates.

    The next edition of this weekly will be published on Friday 9 April.

    Chart of the Week: JP Morgan Emerging Markets Bond Index falls during first quarter of 2021

    Chart of the Week: JP Morgan Emerging Markets Bond Index falls during first quarter of 2021

    Source: Bloomberg. Data as of March 26, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 99bp +4
    Bloomberg Barclays Euro Corporate Index 92bp 0
    Bloomberg Barclays Sterling Non Gilts Index 95bp -1
    Bloomberg Barclays US Corporate High Yield Index 329bp -8
    Bloomberg Barclays Pan-European High Yield Index 316bp +2
    Bond yields (10yr)
    USA 1.63% -9
    Germany -0.38% -9
    Japan 0.09% -3
    UK 0.73% -11
    EquitiesWeek-to-date change
    S&P 500 3,910 -0.1%
    DJ Euro Stoxx 50 3,833 -0.1%
    FTSE 100 6,675 -0.5%
    DAX 14,621 0.0%
    Nikkei 225 28,730 -3.6%
    EUR/USD 1.18 -1.2%
    JPY/USD 109.19 -0.3%
    GBP/USD 1.37 -1.0%
    Brent Crude ($ per barrel) 61.95 -4.0%
    WTI Crude ($ per barrel) 58.56 -4.7%
    Gold ($ per ounce) 1,726.93 -1.0%

    Source: Bloomberg, March 26, 2021. Prices close of business March 25, 2021.

    Economic calendar

    March 29: UK housing prices, Japan retail sales
    March 30: Eurozone economic sentiment, Japan industrial production
    March 31: Eurozone CPI, US ADP private employment, Japan tankan survey
    April 01: US initial jobless claims, eurozone economic bulletin report
    April 02: US non-farm payrolls, US unemployment


    Week to March 19, 2021
    • The US Federal Reserve (Fed) reassured markets over future monetary policy. Following the Federal Open Market Committee’s two-day meeting, Fed Chairman Jerome Powell suggested that, while the economy had recovered more quickly than expected this year, there was sufficient slack in the economy to prevent any near-term tightening in policy. The Fed raised its forecast for this year’s economic growth from 4.2% to 6.5%, reflecting its expectations of a successful vaccine rollout and relatively swift return to normality. It also predicted that unemployment would drop to 4.5%, compared with the 5.0% previously estimated. Crucially, the Fed does not expect core consumer inflation – its preferred inflation measure – to rise much above 2.0% over the next few years. Consequently, the median expectation among Fed officials on interest rates was largely unchanged, implying no rate rise until 2024. The US 10-year Treasury yield had broken through its recent high of 1.6% and climbed above 1.7%, the highest level for 14 months, ahead of the Fed’s meeting. This caused a steepening in the yield curve to its steepest level since late-2015.

    • Eurozone government bond yields rose. Major eurozone bond markets, including Germany, France and Italy, experienced rising medium and long-dated yields over the week, ahead of the Fed’s policy meeting and as investors’ confidence in the global economic recovery rose. A further factor was European Central Bank President Christine Lagarde’s comments that the acceleration in the central bank’s bond-purchasing program, announced last week, would likely take some time. The German 10-year Bund yield climbed back above -0.3%, while the French 10-year government bond yield neared positive territory, causing a steepening in yield curves, before falling back late in the week. The increase in yields occurred despite the disruption to the vaccine rollout in Europe as several major countries decided to suspend the usage of the AstraZeneca vaccine owing to concerns about potential side-effects, while awaiting further clarification from the European Medicines Agency, which announced the vaccine to be “safe and effective.”

    • The Bank of England’s Monetary Policy Committee’s minutes revealed no change to policy.Governor Andrew Bailey confirmed that the central bank had unanimously decided to keep its current monetary policy unchanged. While inflation may pick up in the short term, the upward move is likely to be temporary, according to policymakers. Bailey suggested they would need to see an inflation rate sustainably above 2% before considering a tightening of policy. The 10-year gilt yield rose to a near two-year high before declining late in the week (See chart below).

    • The Bank of Japan made minor adjustments to its monetary policy.The central bank appeared to become a little more hawkish as it marginally widened its self-imposed range on interest rate movements from 0.2% to 0.25%. It also reined back its previous commitment to purchase, on a monthly basis, ¥6trn-worth of exchange-traded funds. However, it kept its targets of zero per cent for the 10-year government bond yield, and -0.1% for short-term interest rates, unchanged. Governor Haruhiko Kuroda stressed that these changes were an effort to ensure that its monetary policy remained effective.

    Chart of the Week: 10-year Gilt yield

    Chart of the Week: 10-year Gilt yield

    Source: Bloomberg. Data as of March 19, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 96bp -2
    Bloomberg Barclays Euro Corporate Index 91bp +2
    Bloomberg Barclays Sterling Non Gilts Index 96bp +2
    Bloomberg Barclays US Corporate High Yield Index 337bp +11
    Bloomberg Barclays Pan-European High Yield Index 308bp +3
    Bond yields (10yr)
    USA 1.71% +8
    Germany -0.26% +4
    Japan 0.11% -1
    UK 0.88% +5
    EquitiesWeek-to-date change
    S&P 500 3,915 -0.7%
    DJ Euro Stoxx 50 3,868 0.9%
    FTSE 100 6,780 0.3%
    DAX 14,776 1.9%
    Nikkei 225 30,217 1.7%
    EUR/USD 1.19 -0.3%
    JPY/USD 108.89 0.1%
    GBP/USD 1.39 0.0%
    Brent Crude ($ per barrel) 63.28 -8.6%
    WTI Crude ($ per barrel) 60.00 -8.6%
    Gold ($ per ounce) 1,736.42 +0.5%

    Source: Bloomberg, March 19, 2021. Prices close of business March 18, 2021.

    Economic calendar

    22 March: Japan leading economic index, eurozone current account
    23 March: UK unemployment, US new home sales
    24 March: UK CPI, US durable goods orders, eurozone consumer confidence
    25 March: US initial jobless claims, Japan CPI
    26 March: UK retail sales, US personal spending, US Michigan consumer sentiment


    Week to March 12, 2021
    • The Organisation for Economic Co-operation and Development (OECD) raised its estimates for global growth. In its interim Economic Outlook report, the OECD revised its outlook for global economic growth for this year, from 4.2% to 5.6%. The positive revision is largely based on the expected lifting of lockdown restrictions afforded by the ongoing COVID-19 vaccine programme. For 2022, the OECD raised its forecast marginally higher, from 3.7% to 4.0%.

    • The 10-year Treasury bond yield challenged its recent high late in the week. The US bond market was a little stronger through much of the week, before selling off towards the end of the week. Having fallen below 1.5% on Thursday, the 10-year Treasury yield rose to 1.6% in early trading on Friday. The US government’s $1.9trn relief bill was finally passed by Congress which appeared to spur the rise in bond yields late in the week, with investor flows showing a sizeable switch from fixed income to equities. February’s consumer inflation rate of 1.7% year on year was sufficiently within expectations as to not unsettle the market, albeit it marked the highest rate for exactly one year. Core inflation, which excludes food and energy prices, fell back to 1.3%, an eight-month low. In other news, a $38bn 10-year government note auction was met with firm demand from investors.

    • Junk bond demand remains high as investors hunt for high, but risky, yield. American Airlines issued a record $10bn in junk bonds and loan notes, the largest amount of debt ever issued by the airline industry. The issue was more than four times covered and attracted a relatively low yield, in the range of 5.5% - 5.75%, indicative of the popularity of such issues despite the added risk.

    • Bank of England Governor Andrew Bailey saw “light at the end of the tunnel”. Governor Bailey struck a relatively upbeat tone in his speech at the Resolution Foundation meeting during the week. His remarks reflected a growing sense that the UK economy will rebound materially later in the year owing to the successful rollout of vaccines which will allow a gradual return to economic and social normality. He also remarked that inflationary pressures remain subdued and are currently not persistent enough to cause the central bank any deep concerns. UK GDP fell by 1.7% in the three months to January, a better figure than had been expected by the market. The yield on 10-year gilts edged lower over much of the week before spiking higher late on.

    • The European Central Bank (ECB) announced that it would significantly increase the current rate of bond purchasing. According to the statement issued by the ECB, the disbursement of monies from the Pandemic Emergency Purchasing Programme would be accelerated, with the aim of preventing unwanted spikes in bond yields. There had been some evidence in recent weeks that the ECB has slowed the pace of its bond-purchasing programme. In other news, fourth-quarter GDP data for the eurozone showed a fall of 0.7% over the quarter, which raises the spectre of a double-dip recession, if, as seems likely, first-quarter 2021 GDP falls further. Eurozone bond yields drifted lower over the week.

    Chart of the Week: US 10-year yields

    Chart of the Week: US 10-year yields

    Source: Bloomberg. Data as of March 12, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 98bp +2
    Bloomberg Barclays Euro Corporate Index 90bp +1
    Bloomberg Barclays Sterling Non Gilts Index 94bp +1
    Bloomberg Barclays US Corporate High Yield Index 326bp -3
    Bloomberg Barclays Pan-European High Yield Index 307bp -7
    Bond yields (10yr)
    USA 1.54% -3
    Germany -0.33% -3
    Japan 0.10% +1
    UK 0.74% -2
    EquitiesWeek-to-date change
    S&P 500 3,939 2.5%
    DJ Euro Stoxx 50 3,846 4.8%
    FTSE 100 6,737 1.6%
    DAX 14,569 4.7%
    Nikkei 225 29,212 1.2%
    EUR/USD 1.20 0.5%
    JPY/USD 108.53 -0.2%
    GBP/USD 1.40 0.9%
    Brent Crude ($ per barrel) 69.63 +0.4%
    WTI Crude ($ per barrel) 66.02 -0.1%
    Gold ($ per ounce) 1,723.82 +1.4%

    Source: Bloomberg, March 12, 2021. Prices close of business March 11, 2021.

    Economic calendar

    15 March: China industrial production, US New York Empire State manufacturing index
    16 March: Eurozone economic sentiment, US retail sales, Japan trade surplus
    17 March: Eurozone CPI, US housing starts
    18 March: Japan CPI, US initial jobless claims
    19 March: UK consumer confidence, UK public sector borrowing


    Week to March 5, 2021
    • US Treasury yields rise back to 1.6%. US Treasury yields were driven higher in the second half of the week, by an increase in growth and long-term inflation expectations and the spread between two-year and 30-year maturities achieved a five-year high. After the jump in the 10-year Treasury yield last week, the bond market had initially appeared to be placated by the US Federal Reserve stating there was enough slack in economies. However, news that the ISM manufacturing purchasing managers’ index for February had risen to a three-year high and President Biden's intimation of enough vaccines to inoculate all adults by the end of May, swung sentiment the opposite way. Biden's fiscal stimulus package passed through the House of Representatives and on to potential approval by the Senate. However, US corporate spreads were unchanged at 92bp as rising rates weighed on spreads at the long end. There was heavy new issuance from Siemens, Marriott, Edison, Atmos and Goldman Sachs.

    • In the UK, all eyes were on Chancellor Rishi Sunak and his 2021 budget.Much of the detail about a rise in corporation tax (up to 25% by 2023) and the freezing of income tax allowances had largely been predicted. The chancellor warned the road to a full recovery would be long and arduous, but saw a recovery in GDP to pre-pandemic levels by mid-2022; an improvement from the previous expectation of the end of 2022. Sentiment was boosted by the Chancellor’s decision to extend the furlough scheme until September. The 10-year gilt yield recovered some of the weakness experienced early in the week, climbing to 0.8%.

    • Government bond yields in the eurozone climbed from mid-week. The absence of any material dovish statement from the European Central Bank and generally positive economic data encouraged traders to push yields higher.

    • Japan’s investors sell record amounts of overseas bonds. Japanese investors sold over $33bn of overseas bonds in the final two weeks of February, a record level, which clearly exacerbated the decline seen in bond markets recently.

    Chart of the Week: US 2 and 30 year Treasury yields diverge

    Chart of the Week: US 2 and 30 year Treasury yields diverge

    Source: Bloomberg. Data as of March 5, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 92bp +2
    Bloomberg Barclays Euro Corporate Index 88bp -1
    Bloomberg Barclays Sterling Non Gilts Index 92bp


    Bloomberg Barclays US Corporate High Yield Index 326bp 0
    Bloomberg Barclays Pan-European High Yield Index 309bp -2
    Bond yields (10yr)
    USA 1.56% +16
    Germany -0.31% -5
    Japan 0.13% -3
    UK 0.73% -9
    EquitiesWeek-to-date change
    S&P 500 3,768 -1.1%
    DJ Euro Stoxx 50 3,705 1.9%
    FTSE 100 6,651 2.6%
    DAX 14,056 2.0%
    Nikkei 225 28,930 -0.1%
    EUR/USD 1.20 -0.9%
    JPY/USD 107.98 -1.3%
    GBP/USD 1.39 -0.3%
    Brent Crude ($ per barrel) 66.74 +0.9%
    WTI Crude ($ per barrel) 63.83 +3.8%
    Gold ($ per ounce) 1,697.52 -2.1%

    Source: Bloomberg, March 05, 2021. Prices close of business March 04, 2021.

    Economic calendar

    08 February: Eurozone investor confidence, German industrial production
    09 February: UK retail sales, US business optimism, China trade balance
    10 February: US CPI, China CPI
    11 February: US initial jobless claims
    12 February: UK Q4 GDP, Eurozone industrial production, US Michigan consumer sentiment index

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