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    Weekly fixed income review: May

    Weekly fixed income review: May

    May 29, 2020 Fixed income
    Week to May 29, 2020
    • US investment-grade borrowers have been raising large amounts of debt. A total of $1trn has been raised year to date, by companies such as Disney, Boeing and Oracle – close to double the run rate of last year. This makes it increasingly likely that the all-time-record figure of $1.4trn in 2017 will be exceeded, given we are only five months into the year.
    • US corporate spreads tightened as foreign flows and the easing of lockdown restrictions across the US boosted sentiment. Improving yields on a currency-hedged basis attracted Asian buying as well. High-beta issuers, such as General Motors and Ally Financial, outperformed. The level of new issuance has slowed as we enter the holiday season and we expect issuance levels to be closer to $100-150bn, down from recent levels of $250bn.
    • The European Central Bank (ECB) issued a warning on rising sovereign debt levels. The ECB warned, in its biannual financial stability review, of the rising risks associated with the huge uplift in national debt across the eurozone. Aggregate debt levels will breach 100% of GDP this year, while budget deficits will rise to around 8%, according to the ECB; and these figures are likely to be far worse in peripheral European nations. The ECB suggested that this level of indebtedness is unsustainable over the medium to long term, particularly if the economic recovery is muted. However, spreads in government bond markets narrowed over the week. As the chart below shows, the spread between Italian and German 10-year government bond yields fell quite sharply, as Italian bonds rallied and German bonds sold off.
    • EU credit markets had a strong week. This was partly driven by a greater ‘risk-on’ appetite, with equity markets rallying and as primary market activity underwhelmed. Cyclical risk and recent marked underperformers in COVID-19-exposed sectors benefited. Peripheral risk was also very strong. The recovery saw several issuers rally through the tight levels seen in April.
    • The Japanese government announced a huge supplementary budget of measures to support the economy, amounting to $1.1trn, and featuring a package of loans, subsidies and other measures to help struggling businesses and local authorities in particular. It brings the total stimulus package, announced by the government, to close to $2.0trn – amounting to around 40% of GDP. We can expect a commensurate increase in government bond issuance in the months to come.
    • Brazil is the latest country to approve quantitative easing. The Brazilian Congress amended the country’s constitution to allow quantitative easing for the first time. The move may pave the way for other emerging market banks to follow suit, as they attempt to mitigate the negative economic forces arising from COVID-19.

    Chart of the Week: Italian/German 10-year government bond yield spread


    Source: Bloomberg as at 29 May 2020

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 175bp -11
    Bloomberg Barclays Euro Corporate Index 168bp -18
    Bloomberg Barclays Sterling Non Gilts Index 163bp -8
    Bloomberg Barclays US Corporate High Yield Index 631bp -49
    Bloomberg Barclays Pan-European High Yield Index 551bp -62
    Bond yields (10yr)
    USA 0.69% +3
    Germany -0.42% +7
    Japan 0.00% 0
    UK 0.21% +4
    EquitiesWeek-to-date change
    S&P 500 3,030 +2.5%
    DJ Euro Stoxx 50 3,094 +6.5%
    FTSE 100 6,219 +3.8%
    DAX 11,781 +6.4%
    Nikkei 225 21,916 +7.5%
    EUR/USD 1.11 +1.6%
    JPN/USD 107.65 0.0%
    GBP/USD 1.23 +1.2%
    Brent Crude ($ per barrel) 35.29 +0.5%
    WTI Crude ($ per barrel) 33.71 +1.4%
    Gold ($ per ounce) 1,718.33 -0.9%

    Source: Bloomberg, as at May 29, 2020. Prices close of business May 28, 2020.

    Economic calendar

    June 1: UK housing prices; EU manufacturing PMIs
    June 3: German unemployment; EU services PMIs, unemployment; US ISM non-manufacturing PMIs
    June 4: EU retail sales, ECB decision, US jobless claims
    June 5: US nonfarm payrolls, unemployment

    Week to May 22, 2020
    • US Treasury yields rose. Yields on US government bonds increased as hopes around a new vaccine for COVID-19 grew. The yield on 10-year Treasuries rose to a two-week high, while that on 30-year US government bonds topped an eight-week high. The US yield curve steepened as ‘risk-on’ sentiment grew, with investors selling government bonds and buying equities. Supply-side issues were another factor weighing on government bonds, particularly at the long end, given the huge stimulus packages announced recently by the US government and the Federal Reserve, in their joint effort to mitigate the negative economic impact of the global pandemic.
    • US corporate spreads tightened 23bp to 185bp as vaccine hopes boosted risk sentiment. High-beta names have been leading the rally, particularly issuers in the energy sector, as well as General Motors and Boeing, as investors hunt for yield. New issuance remains very high, on its way to a record $250bn in May, led by names including AT&T, AutoNation, PPL Corporation, Nucor, and Duke Energy.
    • US and UK employment statistics continued to worsen. Approximately one quarter of the US workforce is now unemployed, as new figures were published showing that a further 2.4mln US citizens had registered as unemployed last week. This brings the cumulative total since the lockdown was introduced to almost 39mln. While the rate of growth in the number claiming unemployment benefits has reduced steadily over the past few weeks, the total figure is of a magnitude that is comparable only with the Great Depression of the 1930s. In the UK, unemployment claims surged by over 850,000, an increase of approximately 70.0%, to 2.1mln in April. While the unemployment rate for the first quarter of 2020 remained relatively subdued at 3.9%, it is set to soar in the current quarter.
    • Negative gilt yields have occurred for the first time. The UK government is borrowing at negative rates for the first time in history. A 3-year bond auction of £3.75bn attracted an average yield of -0.003% and was well covered. Negative interest rates are already prevalent in Germany, Switzerland and Japan – and have been for some time – but this is a first for the UK. The Bank of England appears to be increasingly open to a policy of targeting negative interest rates going forward, which makes a definite shift in approach. The central bank’s governor, Andrew Bailey, said negative interest rates were now under “active consideration” and that it would be “foolish” if this more extreme policy was not being considered, given the material headwinds that have arisen from the arrival of COVID-19. In the meantime, annual headline UK inflation has fallen to 0.8% in April (from 1.5% in March), with a core rate of 1.4% (down from 1.6%).
    • A truce of sorts occurred in Europe as France and Germany hatched a plan for a €500bn ‘recovery fund’ to assist those countries in the eurozone hit hardest by the COVID-19 pandemic. The borrowing will be from the European Commission and repaid through the EU’s overall budget. The plan represents an olive branch from Germany, in particular, after its constitutional court accused the European Central Bank and, by implication, the European Court of Justice of going beyond their legal remits. Other countries, particularly from northern Europe, are still expressing reservations, not least because of the proposed use of grants instead of loans.
    • Euro credit markets had a strong week. Spreads had widened throughout May but sentiment shifted at the start of this week. Dealers started to bid for ‘underperformers’ and recently issued bonds. The primary market was active and new deals performed well. Banks, particularly those in the periphery, got a further boost from the proposal of a ‘recovery fund’ for the eurozone’s economies. It was a notably strong market environment, comparable to the one seen during parts of April.

    Chart of the Week: UK Gilt yields turn negative (3-year yield %)


    Source: Bloomberg as at 22 May 2020

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 185bp -23
    Bloomberg Barclays Euro Corporate Index 187bp -12
    Bloomberg Barclays Sterling Non Gilts Index 172bp -4
    Bloomberg Barclays US Corporate High Yield Index 681bp -76
    Bloomberg Barclays Pan-European High Yield Index 615bp -44
    Bond yields (10yr)
    USA 0.67% +3
    Germany -0.50% +4
    Japan 0.00% 0
    UK 0.17% -6
    EquitiesWeek-to-date change
    S&P 500 2,949 +3.0%
    DJ Euro Stoxx 50 2,905 +4.8%
    FTSE 100 6,015 +3.7%
    DAX 11,066 +5.7%
    Nikkei 225 20,552 +2.6%
    EUR/USD 1.10 +1.2%
    JPN/USD 107.61 -0.5%
    GBP/USD 1.22 +0.9%
    Brent Crude ($ per barrel) 36.1 +11.0%
    WTI Crude ($ per barrel) 33.9 +15.3%
    Gold ($ per ounce) 1,727 -1.0%

    Source: Bloomberg, as at May 22, 2020. Prices close of business May 21, 2020.

    Economic calendar

    May 25: Eurozone GDP
    May 26: US House price index
    May 27: US Richmond Fed manufacturing index
    May 28: Eurozone CPI
    May 29: Eurozone retail sales

    Week to May 15, 2020
    • US-China trade tensions escalated this week as President Trump threatened to “cut off” the relationship and China responded with threats of retaliatory measures against US companies and individuals. The heightened tensions come against a backdrop of weak data: US initial jobless claims rose to 36m with 2.98m (versus 2.5m expected) Americans seeking jobless benefits for the first time for the week ending 9 May. Elsewhere, core CPI experienced a record decline of -0.4% in April (see Chart). However, Federal Reserve Chairman Powell said that despite the deflationary threat, the Federal Open Market Committee’s views on negative interest rates had not changed and that it was not a topic they are contemplating. Yield on the 10-year Treasury fell 6bp.
    • In Europe, German first quarter GDP shrank by -2.2% from the previous quarter, sending Europe’s largest economy into recession. The country’s national statistics agency said steep declines in household spending and investment in machinery and equipment were tempered by government spending and construction activity, preventing a larger GDP decrease. Yield on the 10-year German bund ended the week 1bp lower. Elsewhere, the Italian government approved a new €55bn stimulus package that delivers relief to businesses and individuals. The bill focuses on liquidity for small businesses and individual loans as well as tax breaks. In the UK, Bank of England Governor Andrew Bailey stated that the central bank was not considering negative interest rates.
    • Saudi Arabia announced it would reduce its oil production by 1m barrels a day in an attempt to shore up crude oil prices that have collapsed since the outbreak of COVID-19. Kuwait and UAE followed suit by announcing cuts of their own. The output reduction will be made in addition to the previously agreed global cuts of 9.7m barrels a day that OPEC+ agreed to in April. The price of Brent crude rallied 1% on the news but fell back to end the week slightly above $31 per barrel, only 0.5% higher.
    • In global credit markets, US corporate spreads were flat despite relentless new corporate supply and heated rhetoric between China and the US. The Federal Reserve began purchases of ETFs, though there was limited impact from the purchases as this has been broadly priced into markets. New issuance remains very high, on its way to a record $250 billion for May with issues from Raytheon, Paypal, Honeywell, Disney and Brighthouse. In Europe, credit markets drifted wider during the week, accelerating on Thursday as equities sold off. There was notable new issuance in the early part of the week from Verizon and Daimler.

    Chart of the Week: US monthly Core CPI falls the most since records began (%)

    Chart of the Week: US monthly Core CPI falls the most since records began (%)

    Source: Bloomberg as at 15 May 2020

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 208bp +0bp
    Bloomberg Barclays Euro Corporate Index 196bp +7bp
    Bloomberg Barclays Sterling Non Gilts Index 178bp +4bp
    Bloomberg Barclays US Corporate High Yield Index 762bp +25bp
    Bloomberg Barclays Pan-European High Yield Index 647bp +9bp
    Bond yields (10yr)
    USA 0.62% -6bp
    Germany -0.54% -1bp
    Japan 0.00% -0bp
    UK 0.20% -3bp
    EquitiesWeek-to-date change
    S&P 500 2,853 -2.6%
    DJ Euro Stoxx 50 2,760 -5.1%
    FTSE 100 5,742 -3.3%
    DAX 10,337 -5.2%
    Nikkei 225 19,915 -1.3%
    EUR/USD 1.08 -0.3%
    JPN/USD 107.25 -0.6%
    GBP/USD 1.22 -1.5%
    Brent Crude ($ per barrel) 31.1 +0.5%
    WTI Crude ($ per barrel) 27.6 +11.4%
    Gold ($ per ounce) 1,730 +1.6%

    Source: Bloomberg, as at May 15, 2020. Prices close of business May 14, 2020.

    Economic calendar

    May 19: UK unemployment; EU ZEW economic sentiment index; US housing starts
    May 20: UK/EU inflation; FOMC minutes; EU non-monetary policy meeting
    May 21: US/UK Markit flash PMIs; US jobless claims, existing home sales
    May 22: EU/German Markit flash PMIs; UK retail sales

    Week to May 7, 2020
    • US Treasury yields climbed higher during the week following an announcement by the Treasury Department that it intends to issue a new 20-year note to support record borrowing amid the Covid-19 pandemic as part of its quarterly refunding. 10-year yields gained 5bp on Wednesday to reach 0.72%, while 30-year yields experienced a 9bp increase to reach 1.41%. The 20-year note will feature in an auction on 20 May of US$20bn worth. The note forms part of the Treasury Department’s efforts to extend out the duration profile of government debt. Treasuries have come under pressure after a series of US states such as New York and California pressed ahead with plans to reopen parts of their economies.
    • Germany’s constitutional court ruled that the European Central Bank (ECB) must prove within three months that its €2 trillion quantitative easing programme is a proportionate response. Should it fail to do so, the German Bundesbank will be forced to leave the bond buying scheme. This would prove acutely problematic for the ECB given that the Bundesbank accounts for the largest share of the purchases. The European Commission forecasts that the eurozone economy will contract by a record 7.7% this year because of the pandemic. It also expects to see little-to-no inflation and significant increases in both public debt and budget deficits.
    • In emerging markets, Brazil’s central bank cut its benchmark Selic interest rate by 75bp, which was more than expected and leaves it at a record low of 3.00%. Despite this being the largest cut since October 2017, the central bank remains dovishly tilted and indicated that it may cut rates by a further 75bp as it seeks to negate the economic havoc wrecked by the pandemic. Adding to Brazil’s economic troubles, Fitch lowered its outlook on the sovereign credit rating to negative from stable citing its expectation that the economy will contract by 4% this year, with additional risks to the downside. It also noted Brazil’s worsening fiscal position and increasing political risks.
    • European credit markets had a softer tone over the week. This was a function of profit-taking, increased supply expectations and a more general reduction in investor risk appetite. New issuance was plentiful with issuers such as Eurogrid and Swisscom coming to the market. In US credit, spreads widened marginally off the back of relentless new corporate supply and pending Treasury supply which has given investors an incentive to pause. That said, there has been some improvement and stabilization in beaten-up energy names like Continental and Western Gas as oil prices rebounded. New issuance remains very high, likely to be a record $250 billion in May with Apple, Broadcom, Qualcomm, AIG, GE, JPMorgan and others coming to market.

    Chart of the Week: Brazil’s benchmark interest rate was cut to a record low of 3%

    Chart of the Week-Brazil’s benchmark interest rate was cut to a record low of 3%

    Source: Bloomberg as at 7 May 2020

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 207 +5
    Bloomberg Barclays Euro Corporate Index 190 +4
    Bloomberg Barclays Sterling Non Gilts Index 172 +0
    Bloomberg Barclays US Corporate High Yield Index 736 -8
    Bloomberg Barclays Pan-European High Yield Index 649 +13
    Bond yields (10yr)
    USA 0.70 +6
    Germany -0.51 +8
    Japan -0.02 +1
    UK 0.23 +0
    EquitiesWeek-to-date change
    S&P 500 2,848 -2.2%
    DJ Euro Stoxx 50 2,844 -2.9%
    FTSE 100 5,854 -0.8%
    DAX 10,606 -2.4%
    Nikkei 225 19,619 -2.8%
    EUR/USD 1.08 -1.5%
    JPN/USD 106.12 1.0%
    GBP/USD 1.24 -1.9%
    Brent Crude ($ per barrel) 29.72 17.6%
    WTI Crude ($ per barrel) 23.99 27.3%
    Gold ($ per ounce) 1685.71 0.0%

    Source: Bloomberg, as at May 7, 2020. Prices close of business May 6, 2020.

    Economic calendar

    May 8: UK Gfk consumer confidence flash
    May 11: US consumer inflation expectations; Brazil BCB Focus Market Readout
    May 12:China inflation; US inflation
    May 13: Australia Westpac consumer confidence; New Zealand interest rate decision; UK GDP
    May 14: Australia employment; Germany inflation

    Week to May 1, 2020
    • Central banks expanded support despite dismal forecasts. During its meeting on Thursday, the European Central Bank said it expects 2020 full year GDP to be down anywhere between -5% and -12%. While there was no change to the policy rate or volume/length/composition of asset purchases, the bank announced a 25bp easing of TLTRO rate for the next 12 months. This is in effect a rate cut for banks, who can now borrow at a rate of -1% for one year and -75bps for the following two years for an amount up to 50% of their eligible loan book. The new PELTRO program is also being extended to include lending to the real economy. On the back of this, yields fell in most markets in the front end, while Italy suffered a bit at the longer end of the curve. Meanwhile in the US, the Federal Reserve (Fed) announced an expansion to the scope and eligibility for its Main Street Lending Program. The minimum loan size for certain loans was halved, and businesses with higher annual revenue and employee numbers will now be eligible. A new loan option for more leveraged companies was included. Treasury yields were up slightly as of end of day Thursday.
    • Economic data continued to paint a dreary picture. Eurozone Q1 GDP was down –3.8% quarter-on-quarter (qoq), the largest quarterly contraction since the formation of the single currency back in 1999. France (-5.8% qoq), Spain (-5.2% yoy) and Italy (–4.7% qoq) showed a more pronounced contraction in Q1 GDP than the euro area average, suggesting that Germany’s GDP number is likely to have fared better. Eurozone inflation was higher than expected, with headline at 0.4% year over year (previous: 0.7%), driven by higher food prices. In the US, headline GDP printed below market consensus, at an annualized -4.8% (expected: 3.5%). Meanwhile, US weekly initial jobless claims showed -3.8m Americans filed new claims for jobless benefits last week, a drop on the previous week, but a number that nevertheless brings the six-week total since the start of the coronavirus lockdown to 30m. In the UK, the final manufacturing PMI reading for April dropped to 32.6 from 47.8.
    • Credit markets in the US, Europe and emerging markets (EM) saw plenty of new issuance. US industrials, in particular, have been issuing after reporting earnings to build liquidity. One US multinational printed $25bn in new debt. Markets are now looking to the beginning of the Fed’s corporate bond program, which could be within two weeks, as an incremental source of demand. In the US, corporate spreads tightened, as hopes over Gilead’s COVID-19 anti-viral drug and state easing of lockdown policies offset dire economic data. In Europe, primary market pricing for better quality names, like tech companies, began to look tight. In secondary, the market appeared to be trading more cautiously, with some issues not trading with the premium that they had been a month ago. Meanwhile, EM assets had a good week, on the back of the risk-on sentiment seen in the wider global markets.

    Chart of the Week: Eurozone Q1 GDP suffers largest quarterly contraction on record

    Chart of the Week-Eurozone Q1 GDP suffers largest quarterly contraction on record

    Source: Bloomberg as at 1 May 2020

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index +202 -7
    Bloomberg Barclays Euro Corporate Index +186 -8
    Bloomberg Barclays Sterling Non Gilts Index +172 -5
    Bloomberg Barclays US Corporate High Yield Index +744 -31
    Bloomberg Barclays Pan-European High Yield Index +636 -14
    Bond yields (10yr)
    USA +1 +4
    Germany -1 -11
    Japan -0 -1
    UK +0 -6
    EquitiesWeek-to-date change
    S&P 500 2,912 2.67%
    DJ Euro Stoxx 50 2,928 4.23%
    FTSE 100 5,901 2.59%
    DAX 10,862 5.08%
    Nikkei 225 20,194 4.84%
    EUR/USD 1.10 1.22%
    JPN/USD 107.18 0.31%
    GBP/USD 1.26 1.84%
    Brent Crude ($ per barrel) 25.27 17.9%
    WTI Crude ($ per barrel) 18.84 11.2%
    Gold ($ per ounce) 1686.5 -2.5%

    Source: Bloomberg, as at May 1, 2020. Prices close of business April 30, 2020.

    Economic calendar

    Monday: April Manufacturing PMIs from Italy, France, Germany, euro area; US March factory orders, final March durable goods orders
    Tuesday: April Services and composite PMIs from Australia, UK and US; euro area March PPI; US March trade balance, April ISM non-manufacturing index
    Wednesday: April Services and composite PMIs from Italy, France, Germany, euro area; Germany March factory orders; UK April construction PMI, euro area March retail sales
    Thursday: April services and composite PMIs from China; China April trade balance; UK final April GfK consumer confidence; Germany March industrial production, April construction PMI; France March industrial production, trade balance; Italy March retail sales, US weekly initial jobless claims, preliminary Q1 nonfarm productivity, unit labor costs, March consumer credit
    Friday: Japan final April services and composite PMI; Germany March trade balance; US April change in nonfarm payrolls, unemployment rate, average hourly earnings, final March wholesale inventories

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