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    Weekly fixed income review: May

    Weekly fixed income review: May

    May 28, 2021 Fixed income
    Week to May 28, 2021
    • Investor concerns about rising US inflation eased somewhat after several Federal Reserve (Fed) officials reiterated that any pickup in prices would be transitory and that the Fed was looking to maintain its accommodative monetary policy stance.A recent, larger-than-expected rise in annual consumer price inflation from 2.6% in March to 4.2% in April, along with a comment in the Fed’s April meeting minutes that a tapering of asset purchases could be discussed at a future meeting, had previously rattled US bond markets. Investors are closely watching the Fed’s favored core PCE inflation measure, which is expected to rise from 1.8% in March to 2.9% in April. A $60bn 2-year note auction attracted strong demand. The 10-year Treasury yield fell 2bp over the week, ending at 1.61%.

    • Bank of England (BoE) governor Andrew Bailey, in an annual report to parliament’s Treasury Committee, said that he did not see inflationary pressures building over the medium-to-long term. Rather, the recent increase in inflation was due to global supply-side pressures because of the pandemic. Also, he said that public inflation expectations remain “well anchored”; the BoE forecast this month that consumer price inflation would rise to 2.5% by the end of 2021 (above the BoE’s 2% target), before gradually declining.

    • UK public sector net borrowing, excluding public sector banks, was estimated at £31.7bn in April, which was the second-highest amount for that month’s borrowing since records began in 1993. However, it came in below the Office for Budget Responsibility’s £39bn estimate and last April’s £15.6bn (recorded at the height of the pandemic). Although public borrowing for the fiscal year ending in March 2021 was revised down by £2.8bn to £300.3bn, it remained the highest since the second world war. The 10-year gilt yield fell 2bp over the week, ending at 0.81%.

    • German business morale improved to a new two-year high.The ifo Business Climate indicator for Germany increased from a revised 96.6 in April to 99.2 in May, which was above market expectations. Given more robust economic data in the eurozone, European Central Bank (ECB) president Christine Lagarde said that the ECB was “closely monitoring” borrowing costs but that it was still too soon for the ECB to discuss tapering its asset purchases; other ECB policymakers then echoed her dovish comments. The 10-year Bund yield declined 4bp over the week, ending at -0.17%.

    • Barclays’ annual “Equity Gilt Study” highlighted the dangers of escalating debt levels worldwide as interest rates start to rise.In particular, the bank is concerned about the elevated debt position of various low-growth, high-rate emerging-market countries including Brazil, Turkey and Peru. Ratings agency Fitch has forecast that global government debt will increase by 40% from its pre-COVID-19 level to $95trn by 2022, while the Institute of International Finance said that total global debt was $289trn at the end of the first quarter of 2021.

    Chart of the Week: Year-to-date 10-year Treasury yield has stabilized near 1.6% (%)

    Chart of the Week: Year-to-date 10-year Treasury yield has stabilized near 1.6%

    Source: Bloomberg. Data as of May 28, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 85bp -1
    Bloomberg Barclays Euro Corporate Index 86bp 0
    Bloomberg Barclays Sterling Non Gilts Index 92bp -1
    Bloomberg Barclays US Corporate High Yield Index 302bp -5
    Bloomberg Barclays Pan-European High Yield Index 293bp -4
    Bond yields (10yr)
    USA 1.61% -2
    Germany -0.17% -4
    Japan 0.08% -0
    1UK 0.81% -2
    EquitiesWeek-to-date change
    S&P 500 4,201 1.1%
    DJ Euro Stoxx 50 4,039 0.3%
    FTSE 100 7,020 0.0%
    DAX 15,407 -0.2%
    Nikkei 225 28,549 0.8%
    EUR/USD 1.22 0.1%
    JPY/USD 109.81 -0.8%
    GBP/USD 1.42 0.4%
    Brent Crude ($ per barrel) 69.46 +4.5%
    WTI Crude ($ per barrel) 66.85 +5.1%
    Gold ($ per ounce) 1,896.54 +0.8%

    Source: Bloomberg, May 28, 2021. Prices close of business May 27, 2021.

    Economic calendar

    31 May: China non-manufacturing PMI, China manufacturing PMI
    1 June: China Caixin manufacturing PMI, eurozone CPI, US ISM manufacturing PMI
    2 June: Fed’s Beige Book
    3 June: US ADP employment, US ISM services PMI, US initial jobless claims
    4 June: US nonfarm payrolls, eurozone retail sales

    Week to May 21, 2021
    • Minutes from the latest US Federal Open Market Committee meeting hinted at a greater openness towards a tapering of the US Federal Reserve (Fed)’s bond-purchasing program. Some Fed officials have begun to argue for a reduction in bond purchasing in the future if the economy continues to improve. However, the majority view is that the recent rise in inflation is temporary and that employment across the country needs to improve substantially before a change in monetary policy can be considered. The 10-year US Treasury yield rose back above 1.65% before gently declining at the end of the week. The US dollar index recovered slightly at the end of the week, having traded down to a four-month low. The dollar continued to decline, which was due in part to previous dovish soundings from Fed officials.

    • German bund yields climb to a two-year high. The 10-year bund yield rose to -0.08% on Wednesday, touching its highest level since May 2019 before falling later in the week. Speculation has grown that the European Central Bank may begin to taper its bondpurchasing program, although this has been largely dismissed by senior officials at the central bank. The bank’s half-yearly Financial Stability Review warned of potential economic aftershocks emanating from the current enormous government and corporate debt levels within the system. Ominously, the report stated that “vulnerabilities from the outstanding stock of debt appear higher than in the aftermath of the global financial crisis and the euro area sovereign debt crisis”. Eurozone consumer inflation picked up, rising by 1.6% year on year in April, the largest increase for two years. A more than 10% annual rise in energy prices was a key factor behind the rise.

    • Data released this week showed that corporate bond downgrades in China have surged. Ratings of domestic issuers in China have risen threefold this year, as the Chinese authorities try to grapple with rising default levels and bankruptcies. Over 350 bond issues have been downgraded in the first four months of this year, as domestic ratings agencies toughen their stance under pr essure from the regulators. This follows some high-profile defaults at state-owned enterprises in recent months.

    • UK inflation data picked up in March. Consumer price inflation rose by 1.5% in March on an annual basis, the highest rate of growth for a year, inflated by steeper fuel prices in particular. The producer price index also rose, by 3.9% year on year in April, the highest rate since October 2018, with prices for petroleum products up some 50% year on year, albeit ‘flattered’ by base effects. Hou se prices also surged in March, rising by 10.2% year on year, the fastest pace since August 2007, boosted by Chancellor Rishi Sunak’s extension of the stamp duty holiday. Nevertheless, the 10-year gilt yield was largely unchanged over the week.

    • UK unemployment fell for the third month in succession. Unemployment fell to 4.8% in the three months to March, down from 4.9% in February and the recent peak of 5.1% in December. Also, payrolls and job vacancies rose by nearly 100,000 and 13%, respectively. The number of people on the UK’s furlough scheme fell by 500,000 in March, falling to 4.7m, approximately half of the number at the peak.

    Chart of the Week: German bund yields climb to a two-year high

    Chart of the Week: German bund yields climb to a two-year high

    Source: Bloomberg. Data as of May 20, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 86bp 0
    Bloomberg Barclays Euro Corporate Index 86bp +2
    Bloomberg Barclays Sterling Non Gilts Index 93bp +1
    Bloomberg Barclays US Corporate High Yield Index 311bp +8
    Bloomberg Barclays Pan-European High Yield Index 297bp +3
    Bond yields (10yr)
    USA 1.63% -0
    Germany -0.11% +2
    Japan 0.09% -0
    1UK 0.84% -2
    EquitiesWeek-to-date change
    S&P 500 4,159 -0.4%
    DJ Euro Stoxx 50 4,000 -0.4%
    FTSE 100 7,020 -0.3%
    DAX 15,370 -0.3%
    Nikkei 225 28,098 0.0%
    EUR/USD 1.22 0.7%
    JPY/USD 108.78 0.5%
    GBP/USD 1.42 0.7%
    Brent Crude ($ per barrel) 65.11 -5.2%
    WTI Crude ($ per barrel) 62.05 -5.1%
    Gold ($ per ounce) 1,772.18 -0.3%

    Source: Bloomberg, May 21, 2021. Prices close of business May 20, 2021.

    Economic calendar

    24 May: Chicago Fed National Activity Index
    25 May: German IFO business climate, UK public sector borrowing, US consumer confidence
    26 May: Japan leading economic index
    27 May: US durable goods orders, US initial jobless claims
    28 May: Eurozone consumer confidence, eurozone industrial production, Japan CPI, US personal consumption

    Week to May 14, 2021
    • Concerns about rising global inflation weighed on markets during the week. Bond yields rose across most major markets while equities fell as several data points were released during the week that showed an increase in inflation. Commodity prices also rallied sharply, with copper and iron ore reaching new all-time highs. The US consumer inflation rate for April came in at 4.2% year on year, marking the highest rate since September 2008. While the base effect (inflationary pressures were weak in April 2020) was a key factor behind the rise in inflation, the figure was still well ahead of market expectations and caused an immediate spike in global bond yields. The 10-year Treasury yield rose back above 1.7%. Core inflation, which excludes more volatile energy and food prices, rose 3.0% year on year, also well ahead of expectations and the highest increase for over 25 years. Elsewhere, Chinese producer prices rose by 6.8% year on year in April, the fourth consecutive increase and the highest since October 2017.
    • The UK eased COVID-19 restrictions further, allowing greater opportunities for travel and recreation. Economic sentiment was boosted by the announcement across all the devolved administrations of the UK of a further relaxation of lockdown restrictions. COVID-19-related statistics continued to improve and there were no deaths in England on 10 May due to COVID-19 for the first time since last March. The improving economic outlook encouraged Bank of England chief economist Andy Haldane to state that his fellow Monetary Policy Committee members are not optimistic enough, in his view, despite the central bank last week raising its outlook for 2021 GDP from 5.0% to 7.25%. He expects consumer and business spending to surprise on the upside this year as conditions return to normal. The 10-year gilt yield rose above 0.9% for the first time in two years.
    • UK GDP fell in the first quarter but rose in March. First-quarter GDP fell by 1.5% sequentially, a little better than had been forecast. GDP in March rose 2.1% month-on-month, reflecting the gradual easing of some COVID-19-related restrictions and the ongoing vaccination program which has seen over half of the adult population inoculated.
    • More green bonds were issued in Germany. The German government launched a €6bn 30-year green bond this week, at an average yield of 0.391%, which was over six times oversubscribed, underlining the popularity of green bonds to investors. The launch follows two previous green bond issues of five- and 10-year maturities, issued late last year, and thereby extends the range of maturities offered to the market.  The bids totaling €39bn were the highest ever received by a German government syndicated issue. Meanwhile, German bund yields rose to around -0.10%, while German 10-year breakeven rates rose towards 1.5%, the highest level in seven years, as long-term inflation expectations rose.
    • Amazon raised $18.5bn in debt at only a small premium to US government debt yields. Amazon raised the money across a range of maturities at the lowest spread to government bond yields ever seen in the corporate bond market. According to data from Refinitiv, the additional 0.1% that Amazon is paying for its two-year bonds over the equivalent Treasury note is the lowest for any issuer.

    Chart of the Week: 10-year German bund yield (%)

    Chart of the Week: 10-year German bund yield (%)

    Source: Bloomberg. Data as of May 14, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 87bp 0
    Bloomberg Barclays Euro Corporate Index 84bp 0
    Bloomberg Barclays Sterling Non Gilts Index 92bp +1
    Bloomberg Barclays US Corporate High Yield Index 305bp +16
    Bloomberg Barclays Pan-European High Yield Index 297bp +5
    Bond yields (10yr)
    USA 1.66% +8
    Germany -0.12% +10
    Japan 0.09% +1
    1UK 0.90% +12
    EquitiesWeek-to-date change
    S&P 500 4,113 -2.8%
    DJ Euro Stoxx 50 3,952 -2.0%
    FTSE 100 6,963 -2.3%
    DAX 15,200 -1.3%
    Nikkei 225 27,448 -6.5%
    EUR/USD 1.21 -0.7%
    JPY/USD 109.47 -0.8%
    GBP/USD 1.41 0.5%
    Brent Crude ($ per barrel) 67.05 -1.8%
    WTI Crude ($ per barrel) 63.82 -1.7%
    Gold ($ per ounce) 1,826.72 -0.2%

    Source: Bloomberg, May 14, 2021. Prices close of business May 13, 2021.

    Economic calendar

    17 May: Japan Q1 GDP, China industrial production, US NY Empire State manufacturing index
    18 May: UK unemployment, eurozone trade balance, US housing starts
    19 May: UK CPI, RPI and PPI, eurozone CPI, Japan trade balance
    20 May: US initial jobless claims, US Philly Fed manufacturing survey, Japan CPI
    21 May: UK retail sales, UK, US, and eurozone PMI

    Week to May 7, 2021
    • US treasury yields drifted lower over the week as Janet Yellen’s hawkish comments were clarified. The 10-year Treasury yield fell below 1.6% after US Treasury secretary Yellen said the government’s vast fiscal packages would inevitably lead to interest rate hikes; she clarified that inflation would likely remain subdued and so limit the need for a rate hike. Meanwhile, employment data continued to improve. The ADP data for additions to private payrolls in April rose to 742,000, albeit below expectations, while March’s figure was revised higher to 565,000. Long-term inflation expectations remain high and the breakeven rate of 10-year Treasury Inflation-Protected Securities edged higher towards 2.5%, an eight-year high.

    • US high-yield bond yields continued to fall, benefiting from ongoing risk appetite from investors. The trend of falling high-yield bond yields remained in place, as investors’ hunt for income pushed the yield on ‘CCC’-rated bonds down to approximately 7.2%. The instruments’ spread over the 10-year Treasury yield has fallen to a seven-year low as risk appetite has remained high, causing some concern among commentators. High levels of new issuance have been easily absorbed by investors and ensured that risky borrowers have accessed necessary funding. In corporate issuance more generally, there was $20 billion in issuance from JPMorgan, Orbia, and several utilities.

    • The Bank of England (BoE) announced a reduction in the rate of its monthly bond purchases and raised its economic forecast. At its May policy meeting, the BoE stated that it would slow the pace of its weekly bond purchases from £4.4bn to £3.4bn, while still maintaining the overall bond-purchasing budget at £895bn. At the same time, it raised its forecast for 2021 GDP growth to 7.25%, from the previous estimate of 5.0%. If achieved, this would mark the highest rate of growth for over 70 years. However, the central bank anticipates a slowdown in 2022, with growth easing to 5.75%. Bond yields drifted lower over the week, with the 10-year gilt yield ending at around 0.8%.

    • Spain called for reform of the eurozone’s deficit rules. Deputy prime minister and economics minister Nadia Calvino called on the eurozone to re-examine its rules on the 3% budget deficit limit, once the current suspension of the rule due to COVID-19 expires in 2022. Most eurozone nations have deficits well above this level and will likely need to either cut spending or raise taxes, arguably both, to once again meet the rules. The aggregate budget deficit level rose from 0.6% at the end of 2019 to 7.2% at the end of 2020. Spain topped the list at 11%.

    Chart of the Week: US inflation sees 'base effect' bounce back

    Chart of the Week: US inflation sees 'base effect' bounce back

    Source: Bloomberg. Data as of May 7, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 88bp 0
    Bloomberg Barclays Euro Corporate Index 85bp +1
    Bloomberg Barclays Sterling Non Gilts Index 91bp 0
    Bloomberg Barclays US Corporate High Yield Index 291bp 0
    Bloomberg Barclays Pan-European High Yield Index 294bp +3
    Bond yields (10yr)
    USA 1.57% -6
    Germany -0.23% -2
    Japan 0.09% -1
    1UK 0.79% -5
    EquitiesWeek-to-date change
    S&P 500 4,202 0.5%
    DJ Euro Stoxx 50 3,999 0.6%
    FTSE 100 7,076 1.5%
    DAX 15,197 0.4%
    Nikkei 225 29,331 1.8%
    EUR/USD 1.21 0.4%
    JPY/USD 109.09 0.2%
    GBP/USD 1.39 0.5%
    Brent Crude ($ per barrel) 68.09 +1.2%
    WTI Crude ($ per barrel) 64.71 +1.8%
    Gold ($ per ounce) 1,815.22 +2.6%

    Source: Bloomberg, May 7, 2021. Prices close of business May 6, 2021.

    Economic calendar

    10 May: Eurozone investor confidence, Japan household spending
    11 May: China CPI, US business optimism, eurozone economic sentiment
    12 May: UK Q1 GDP, UK industrial production, UK trade balance, US CPI
    13 May: US initial jobless claims, US PPI
    14 May: US retail sales, US industrial production, US consumer sentiment

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