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    Weekly fixed income review: March

    Weekly fixed income review: March

    March 27, 2020 Fixed income
    Week to March 27, 2020
    • The Federal Reserve (Fed) announced that it will now purchase an unlimited amount of Treasuries and agency mortgage-backed securities via its quantitative easing (QE) program. This removes the $700bn cap on asset purchases set last week. In addition to its QE program, the Federal Reserve announced two new facilities that allow the central bank to purchase corporate bonds in the primary and secondary markets. The Fed stated that “it has become clear that our economy will face severe disruptions” and that “aggressive efforts must be taken across public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery”. The central bank also revived its Term Asset-Backed Securities Loan Facility (TALF), a program which allows the Fed to purchase securities backed by several types of consumer and small business loans. The fiscal stimulus, combined with the Fed’s unprecedented actions, have greatly improved investor confidence. US Treasury yields ended the week broadly unchanged.

    • The US Senate unanimously agreed to pass a $2tn fiscal stimulus package. The stimulus bill provides expanded jobless benefits, $500bn of funding to the economy, $350bn in loans to small businesses, $150bn in hospital aid, and $1,200 to workers earning below $75,000 per year. The bill, which moves to the House of Representatives for a vote on Friday, comes just as the government reported an historic surge in initial weekly jobless claims (see chart). Market participants widely expect next week’s reading to be even higher.
    • In Europe, more stimulus measures were announced this week. Details of the European Central Bank’s (ECB) Pandemic Emergency Purchase Programme (PEPP) revealed that the central bank’s self-imposed issuer limit (which restricts the ECB from buying more than a third of a country’s eligible bonds) will not apply to the €750bn bond purchases. Core and peripheral eurozone bonds rallied on the news of extra support with the German 10-year yield falling and the Italian 10-year yield dropping to a two-week low of 1.2%. Elsewhere, German lawmakers voted for a €750bn stimulus package and the Bank of England kept rates at 0.1% after cutting its benchmark interest rate twice in two weeks.
    • In credit, there was a flurry of new issuance in US and European markets. In the US, weekly new issuance hit a record of $98.4bn. US corporate spreads widened overall, though in recent days the market has markedly improved with many bonds 100bp off their wides. In Europe, markets stabilized and there was also material new issuance. There was also increased activity from rating agencies who began to downgrade several companies and sectors and issue negative outlooks.
    • Bond funds saw a second week of record outflows with an estimated $218bn leaving bond funds in the last two weeks (according to EPFR Global). Emerging market debt and mortgage-backed securities made up the majority of outflows.

    Chart of the Week: Filings for US unemployment benefits reached historic levels

    Chart of the Week- Filings for US unemployment benefits reached historic levels

    Source: MOVE Index – implied one-month volatility in the Treasury market. Bloomberg as at March 27, 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 302bp -61
    Bloomberg Barclays Euro Corporate Index 242bp +6
    Bloomberg Barclays Sterling Non Gilts Index 219bp +4
    Bloomberg Barclays US Corporate High Yield Index 959bp -54
    Bloomberg Barclays Pan-European High Yield Index 800bp -76
    Bond yields (10yr)
    USA 0.84% 0
    Germany -0.36% -4
    Japan 0.00% -8
    UK 0.40% -16
    EquitiesWeek-to-date change
    S&P 500 2,630 +14.1%
    DJ Euro Stoxx 50 2,848 +11.7%
    FTSE 100 5,816 +12.0%
    DAX 10,001 +12.0%
    Nikkei 225 18,665  +12.8%
    Currencies
    EUR/USD 1.10 +3.2%
    JPN/USD 109.58 +1.2%
    GBP/USD 1.22 +4.9%
    Commodities
    Brent Crude ($ per barrel) 26.3 -2.4%
    WTI Crude ($ per barrel) 22.6 +0.8%
    Gold ($ per ounce) 1,631 +8.9%

    Source: Bloomberg, as at close on March 26, 2020

    Economic calendar

    March 30: EU Business Confidence, German Inflation 
    March 31: German Unemployment, UK GDP, EU Inflation
    April 1: German Retail Sales, EU Manufacturing PMI, EU Unemployment, US Manufacturing PMI
    April 2: US Initial Jobless Claims
    April 3: EU Services PMI, US Payrolls, US Unemployment

    Week to March 20, 2020
    • It has been a week of extraordinary monetary response from the world’s major global central banks including the US Federal Reserve (Fed). Over the weekend, the Fed sprang into action with an emergency rate cut, bringing its target rate close to zero. It also announced that it will expand liquidity injections with US$700bn of asset purchases, in an effort to sharply increase bank reserves and loosen pressure on dealer balance sheets. There was also considerable activity on the fiscal side: Senate Republicans formally rolled out a US$1trn economic stimulus plan aimed at supporting both US businesses and the public. Negotiations between Republicans and Democrats on the Coronavirus Aid, Relief and Economic Security Act begins in earnest. Despite the stimulus measures, US Treasury yields have been trading in a volatile manner. After touching lows of 0.71%, the 10-year Treasury yield moved as high as 1.19% even as risk assets sold off, reflecting liquidity issues in the market and investors selling to meet margin calls. The number of confirmed Covid-19 cases has now surpassed 10,000 in the US.

    • European Central Bank (ECB) President Christine Lagarde apologized to members of the ECB governing council after she said it was not the ECB’s role to “close the spread” in European sovereign debt markets, triggering a bond market sell-off. The selling eased mid-week after the ECB followed the Fed by unveiling plans to buy an extra €750bn of bonds and issued a “no limits” commitment to defend the eurozone. Dubbed the Pandemic Emergency Purchase Programme, the ECB stated that all purchases would be carried out this year and on top of purchases already announced, and covers both sovereign and corporate bonds. Bonds rallied across the eurozone on the announcement. Italian government bonds partially retraced their sell-off with the 10-year yield falling back to 1.61% from 2.44%.

    • Emerging market debt has had a turbulent week, suffering from a double whammy of the Covid-19 pandemic risk sell-off and (for several key emerging markets) the collapse in oil prices that has occurred after Saudi Arabia decided to aggressively increase output. Spreads of US dollar emerging market sovereign bonds are approaching highs achieved during the global financial crisis highs, while emerging market currencies have sold off sharply (particularly oil producers) across the board.
    • In credit, US corporate spreads widened on ongoing coronavirus worries and concerns over whether or not the fiscal and monetary response will be sufficient to contain the economic fallout. Liquidity was challenged; negative fund flows have forced selling which pushed spreads higher. There was over $20 billion of new issuance as firms like Disney, Verizon, Progressive, and Northrop sought to sure up liquidity. In Europe, the first few trading days were characterised by very poor liquidity, especially in shorter-dated bonds as investors sold this part of the curve to fund actual or expected outflows. The ECB announcement then instilled some positivity into thethe market, prompting some demand for paper eligible for its purchase programme. There was new issuance today from Unilever and Engie.

    Chart of the Week: In a week of spread blowouts, EM sovereign spreads* approached global financial crisis wides

     Chart of the Week- In a week of spread blowouts, EM sovereign spreads approached global financial crisis wides

    Source: MOVE Index – implied one-month volatility in the Treasury market. Bloomberg as at March 20, 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 329bp +113
    Bloomberg Barclays Euro Corporate Index 232bp +50
    Bloomberg Barclays Sterling Non Gilts Index 216bp +53
    Bloomberg Barclays US Corporate High Yield Index 976bp +249
    Bloomberg Barclays Pan-European High Yield Index 872bp +215
    Bond yields (10yr)
    USA 1.14% +18
    Germany -0.19% +35
    Japan 0.08% +3
    UK 0.72% +31
    EquitiesWeek-to-date change
    S&P 500 2,409 -11.1%
    DJ Euro Stoxx 50 2,454 -5.1%
    FTSE 100 5,152 -4.0%
    DAX 8,610 -6.7%
    Nikkei 225 16,553  -5.0%
    Currencies
    EUR/USD 1.07 -3.7%
    JPN/USD 110.71 -2.8%
    GBP/USD 1.15 -6.5%
    Commodities
    Brent Crude ($ per barrel) 28.5 -15.9%
    WTI Crude ($ per barrel) 25.2 -20.5%
    Gold ($ per ounce) 1,471 -3.8%

    Source: Bloomberg, as at close on March 19, 2020

    Economic calendar

    March 23: US Chicago Fed National Activity Index
    March 24: UK Markit services PMI
    March 25: UK CPI
    March 26: Japan CPI
    March 27: Eurozone CPI

    Week to March 13, 2020
    • The global spread of the coronavirus, and responses by governments seeking to contain it, continued to drive risk-off sentiment and led to volatility across global markets. US President Donald Trump suspended travel from Europe’s Schengen Area to the US, while Italy imposed a temporary lock-down across the country. Several countries, including Ireland, Spain, Portugal and France announced school closures, with some also placing restrictions on large gatherings. Against this backdrop, US government bond yields fell to record lows on Monday, with 10-year Treasury yields plummeting to 54bp, before rebounding. Bund and gilt yields also dipped sharply before recovering, while emerging market hard-currency sovereigns suffered one of the worst weeks on record. Global stock markets plunged, with some recording their worst single-day falls in over 30 years.
    • After Russia refused to cut oil production in the wake of falling demand after the virus outbreak, Saudi Arabia delivered a shock to markets by announcing plans to raise oil production. The news led to a dramatic decline in the oil price when markets opened at the beginning of the week. This exacerbated spread widening in US high yield credit, given that energy makes up 14% of the overall US high yield market.
    • Central banks announced significant stimulus measureson the back of last week’s Federal Reserve rate cut. The Bank of England delivered an emergency cut to rates from 0.75% to 0.25%, which had been widely expected by markets. On the other hand, the European Central Bank (ECB) decided against cutting the deposit rate, but raised its net asset purchases to c. €33bn a month for the rest of the year, in line with expectations. Bund yields did not move markedly in response, but during the following press conference, ECB President Lagarde remarked that the ECB "was not here to close spreads" between the periphery and the core. This led to a sharp rise in intra-European yield spreads, with Italian government bonds spreads over bunds jumping sharply: the ECB moved to correct the statement.
    • Credit spreads widened globally. In the US, corporate spreads widened considerably given limited fiscal and monetary response, with the oil sector the worst performer due to the actions of Saudi Arabia earlier in the week. In the US primary market, there was $5 billion of new issuance from issuers such as a US coffee company and a US industrial conglomerate. Meanwhile in European credit, market liquidity was poor, with several sectors under pressure, including leisure and travel. There was an €800m new issue from a French food producer.

    Chart of the Week: Government bond volatility increased dramatically

    Chart of the Week-Government bond volatility increased dramatically

    Source: MOVE Index – implied one-month volatility in the Treasury market. Bloomberg as at March 13, 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 209bp +65
    Bloomberg Barclays Euro Corporate Index 174bp +46
    Bloomberg Barclays Sterling Non Gilts Index 156bp +32
    Bloomberg Barclays US Corporate High Yield Index 726bp +176
    Bloomberg Barclays Pan-European High Yield Index 648bp +194
    Bond yields (10yr)
    USA 0.80% +4
    Germany -0.74% -3
    Japan -0.06% +6
    UK 0.27% +3
    EquitiesWeek-to-date change
    S&P 500 2,481 -16.5%
    DJ Euro Stoxx 50 2,545 -21.3%
    FTSE 100 5,237 -19.0%
    DAX 9,161 -20.6%
    Nikkei 225 18,560  -10.6%
    Currencies
    EUR/USD 1.12 -0.9%
    JPN/USD 104.64 +0.7%
    GBP/USD 1.26 -3.7%
    Commodities
    Brent Crude ($ per barrel) 33.2 -26.6%
    WTI Crude ($ per barrel) 31.5 -23.7%
    Gold ($ per ounce) 1,576 -5.8%

    Source: Bloomberg, as at close on March 12, 2020

    Economic calendar

    Monday: China year-to-date February retail sales, property investment, industrial production, fixed assets ex. rural; Italy final CPI
    Tuesday: Japan final January industrial production and capacity utilization, February trade balance; UK February January average weekly earnings; eurozone January construction output, Q4 labor costs; Germany March ZEW survey results; US February retail sales, industrial production, capacity utilization, manufacturing production
    Wednesday: Eurozone January trade balance, final February CPI; US latest weekly mortgage applications, February building permits and housing starts; Japan's February CPI
    Thursday: Japan January all industry activity index; US Q4 current account balance,
    Friday: Germany February PPI; France final Q4 wages; eurozone January current account balance; US February existing home sales

    Week to March 06, 2020
    • The US Federal Reserve (Fed) announced a 50bp emergency interest rate cut in response to the global coronavirus outbreak. Fed chairman Jerome Powell stated that “the fundamentals of the US economy remain strong” but that the virus “poses evolving risks to economic activity.” The move brought the benchmark funds rate to 1%-1.25% and marks the first intermeeting action since the global financial crisis. The Bank of Canada followed the Fed’s lead and also delivered a 50bp cut, its biggest in over a decade. In emerging markets, credit spreads widened markedly; Chinese government bonds outperformed other emerging market sovereigns.
    • US Treasury yields hit all-time lows as renewed fears around the coronavirus fueled the market’s risk-off sentiment. The yield on the 30-year Treasury fell to a new low of 1.36% while the 10-year yield dropped 38bp and slipped below 1% for the first time.
    • US corporate spreads widened as the emergency Fed rate cut and a strong result for Joe Biden in the Democratic primaries on 'Super Tuesday' failed to quell worries about widening coronavirus cases. The widening continued across all sectors, but energy and leisure were particularly hard hit. Additionally, there was $16 billion of new issuance from Smucker's, McDonalds, Daimler, Truist Financial and Newmont.
    • European sovereign yields also fell to new lows as investors fled to safe-haven assets. The 10-year German bund yield, already in negative territory, slid 13bp to a new low of -0.74% while UK gilts of the same maturity hit 0.24% – also a record low. Market participants expect the European Central Bank and the Bank of England, both due to meet later this month, to announce stimulus measures in response to the economic impact of the coronavirus.
    • In European credit, primary issuance remained lackluster due to virus volatility. Berkshire Hathaway and Schneider Electric were among the few issuers in the thin investment grade market. Elsewhere, non-investment grade supply suffered as Belarus postponed its euro-dollar offering due to virus concerns. 

    Chart of the Week: US 10-year Treasury yield dips to record low (%)

    Chart of the Week- US 10-year Treasury yield dips to record low_6-Mar-2020

    Source: Bloomberg and US Bureau of Labor Statistics. Data as at March 06, 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 128bp +6
    Bloomberg Barclays Euro Corporate Index 118bp +4
    Bloomberg Barclays Sterling Non Gilts Index 120bp +2
    Bloomberg Barclays US Corporate High Yield Index 494bp -6
    Bloomberg Barclays Pan-European High Yield Index 417bp +7
    Bond yields (10yr)
    USA 0.77% -38
    Germany -0.73% -12
    Japan -0.12% +3
    UK 0.24% -20
    EquitiesWeek-to-date change
    S&P 500 3,023.9 2.36%
    DJ Euro Stoxx 50 3,245.3 -2.53%
    FTSE 100 6,486.9 -1.42%
    DAX 11,515.5 -3.15%
    Nikkei 225 20,749.8  -1.86%
    Currencies
    EUR/USD 1.13 2.61%
    JPN/USD 105.32 2.58%
    GBP/USD 1.30 1.33%
    Commodities
    Brent Crude ($ per barrel) 47.95 -5.09%
    WTI Crude ($ per barrel) 44.00 -1.70%
    Gold ($ per ounce) 1,685.88 +6.32%

    Source: Bloomberg, March 06, 2020

    Economic calendar

    March 9: German Industrial production
    March 10: French non-farm payrolls, EU GDP 
    March 11: UK industrial and manufacturing production, UK GDP, US Inflation 
    March 12: EU industrial production, US unemployment, ECB meeting 
    March 13: Germany and France inflation

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