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    Weekly fixed income review: November

    Weekly fixed income review: November

    November 24, 2023 Fixed income
    Week to November 24, 2023
    • US bond yields remain largely unchanged. Treasury yields ended the week largely unchanged, despite a brief rally, particularly in short-dated Treasuries. The publication of the University of Michigan’s consumer inflation expectations showed both long-term and one-year forecasts unexpectedly increasing. While the Federal Open Market Committee meeting minutes for November confirmed that Fed officials would remain more focused on containing inflation through restrictive monetary policy and that rate cuts were still far off. Despite this, Fed Fund futures currently indicate approximately 80bp of rate cuts by the end of 2024.

    • A surge of buying interest helps US corporate bonds rally. With investors betting that interest rates have peaked, corporate bonds (especially high-yield bonds) have benefited as large sums have been committed to the asset class. According to data from funds flow data provider EPFR, more than $16bn has been invested into US corporate bonds in the month to 20 November, the highest monthly level for more than three years. Approximately 70% of that money has flowed into low-rated high yield bonds, causing average spreads over government bonds to contract by approximately 50bp since the beginning of the month.

    • UK gilt yields rise following Autumn Statement. Ten-year and two-year gilt yields were considerably higher over the week, with much of the increase coming after Chancellor’s Autumn Statement, as investors interpreted the details – featuring significant tax cuts for businesses and individuals – as potentially inflationary. The Office for Budget Responsibility subsequently cut its growth forecast and raised its inflation predictions for the next few years. Yield increases were also supported by news that the Debt Management Office had revised its forecast for debt issuance for this financial year at £237.3bn, ahead of previous forecasts.

    • European Central Bank (ECB) meeting minutes push eurozone bond yields slightly higher. Eurozone bond yields picked up as investors digested the ECB minutes for November. The 10-year German bund yield gained a few basis points, rising above 2.6%. Earlier in the week, it had touched 2.5%, its lowest level since early September. The minutes underlined the ECB’s determination to keep monetary policy restrictive despite the risks to growth. In a speech earlier in the week, ECB President Christine Lagarde had warned against any complacency over inflation, stating it was not yet “the time to start declaring victory” over rising prices.

    • Elections in the Netherlands and Argentina produce victories for right-wing populist candidates. Geert Wilders and the right-wing PVV party he leads, won the most seats in the Dutch election, which could usher in a right-wing coalition. The parliamentary election followed the collapse of Mark Rutte’s more liberal VVD-led center-right coalition government. The make-up of the next Dutch government may take some time to be agreed. Meanwhile, in Argentina, the populist right-wing candidate Javier Milei defeated the left’s Sergio Massa in the run-off to be the country’s next president.

    Bloomber table-24-11-23-US.svg

    Source: Bloomberg, November 24, 2023. Prices close of business November 23, 2023.

    Economic calendar

    27 Nov: US new home sales.
    28 Nov: UK shop price index, US and Germany consumer confidence.
    29 Nov: US trade balance, Germany CPI, Japan industrial production and retail sales.
    30 Nov: Eurozone CPI and unemployment, US PCE and initial jobless claims.
    01 Dec: China manufacturing PMI, US ISM manufacturing PMI, UK manufacturing PMI.

    Week to November 17, 2023
    • Treasury yields decline on lower inflation. Yields fell across the curve as hopes grew that lower consumer price inflation would stay the Federal Reserve’s hand regarding further rate hikes. The 10-year Treasury yield dropped by approximately 20bp to 4.4%, a near two-month low, following the release of the data. Fed fund futures indicated a 75%-80% probability of rate cuts by May 2024. October’s drop in headline inflation to 3.2% from 3.7% in September was slightly better than expected and was driven by a continued fall in energy costs, plus easing food and shelter prices. Core inflation fell by 0.1% to 4.0%. Meanwhile, producer price inflation fell 0.5% over the month, its steepest decline for over three years.

    • Moody’s downgrades the outlook for US credit. Ratings agency Moody’s cut its rating on US corporate debt last Friday to ‘negative’ from ‘stable’. The cut predominantly reflected the squeeze on corporate borrowers from higher rates. US Treasury Secretary Janet Yellen was quick to make her disagreement with the downgrade clear, stating that the sector was liquid and not in trouble. Moody’s, however, continues to assign its top rating of ‘AAA’ to US sovereign debt, despite Fitch and S&P having cut theirs.

    • Munis rally in line with US Treasuries. High grade muni yields fell 13-17 basis points and ratios were unchanged for the week (65% in two years, 67% in five years, 69% in ten years and 89% in thirty years). The primary calendar drew strong investor interest with large oversubscriptions. For example, the $515 million Great Lakes MI Water & Sewer (Aa3/AA-) issue saw some maturities oversubscribed 20 times over. Demand was again strong from retail SMA accounts. Mutual fund outflows continued at $235 million as ETF inflows of $709 million were not enough to offset $942 million of open-end fund redemptions. There is no calendar to speak of for the upcoming Thanksgiving holiday week. The ten-year tax-exempt AAA rated muni yield stands at a 3.05% and a 10-year AA rated taxable muni is yielding around a 5.15 – 5.20%.

    • Eurozone bond yields fall following mixed economic data. Eurozone bond yields declined, with the yields on 10-year bunds, Italian BTPs and French OATs all trading at their lowest levels for over two months. While there was encouragement from Germany’s economic sentiment index, which climbed to its highest level for eight months, eurozone industrial production for September underwhelmed investors, falling by 1.1% over the month. In addition, the EU revised down its outlook for eurozone GDP for this year by 0.2% to 0.6%, and next year by 0.1% to 1.2%.

    • Gilt yields fall as UK inflation dips beneath 5%. Gilt yields fell across the curve, with the 10-year gilt yield dropping below 4.1%, its lowest level for nearly six months. A year on from hitting a generational high of 11.1%, headline inflation fell to less than half that level in October and below consensus forecasts to 4.6% . It was the lowest figure for two years, largely driven by a large drop in household gas and electricity prices following a reduction to Ofgem's cap. Core inflation also declined to 5.7% from 6.1% in September. Data released earlier in the week indicated that wage growth (excluding bonuses) had declined to 7.7% in the three months to September from 7.9% last month, the first fall in the series since January.

    Bloomber table-17-11-23-US.svg

    Source: Bloomberg, November 17, 2023. Prices close of business November 16, 2023.

    Economic calendar

    20 Nov: Germany PPI, BoE Governor Bailey’s policy speech.
    21 Nov: US FOMC minutes.
    22 Nov: US durable goods, initial jobless claims and consumer sentiment.
    23 Nov: Japan CPI, eurozone and UK (flash) PMIs.
    24 Nov: Japan leading economic index, US (flash) PMI.

    Week to November 10, 2023
    • US bonds sell off on Powell’s hawkish comments. Treasury yields edged higher late in the week following Federal Reserve, chairman, Jerome Powell’s speech on Thursday, in which he stated firmly that the fight against inflation would continue, and that the Fed would not “hesitate to” raise rates. The two-year yield was back above 5% on Friday morning, leading to a more inverted yield curve. The market’s bullish spirits were also dampened by a low take-up at 10-year and 30-year bond auctions, with the latter featuring the weakest demand for over 11 years. Conversely, there was evidence of large fund flows into higher-yielding corporate bonds, with spreads tightening, notably in ‘BB’ and ‘B’-rated (junk) bonds during November.

    • Until the US Treasury sell-off on Thursday, the muni market had a good tone with rates falling 13-15 basis points. Munis weakened slightly in sympathy with Treasuries on Thursday; however, that outperformance could be fleeting in view of the magnitude and velocity of the Treasury move. Ratios richened by 3-5 ratios (65% in two years, 67% in five years, 69% in ten years and 88% in thirty years). The primary calendar was well received earlier in the week with large oversubscriptions, deal repricings and as financings previously on hold were placed back into the market. Demand was particularly strong from retail SMA accounts. Mutual fund outflows continued but at a lesser rate of $151 million. Next week’s calendar is approximately $6.5 billion. The ten year tax-exempt AAA rated muni yield is 3.20% and a 10 year AA rated taxable muni is yielding around a 5.35%

    • Falling eurozone producer price index (PPI) drives bond yields lower. The eurozone PPI dropped at a record pace in September, down by 12.4% year on year, the fifth successive month of decline. This initially pushed bond yields lower, with the German and French 10-year yields close to six-week lows mid-week, before they recovered. Meanwhile, the IMF argued that the European Central Bank must keep rates at current levels through 2024 to ensure inflation is sufficiently controlled. The head of the IMF’s European Department, Alfred Kammer, argued that “it is less costly to be too tight rather than to be too loose”.

    • UK bond yields fall on growing hopes of a rate cut next year. Bank of England (BoE) Chief Economist Huw Pill stated in an online Q&A session that the idea of a rate cut sometime in the middle of 2024 was not “totally unreasonable”. The comments from Pill contrasted with those of BoE Governor Andrew Bailey, who said last week that it was “much too early” to be discussing rate cuts. However, Pill later suggested that rates would need to stay high. The 10-year gilt yield dipped towards 4.2%, its lowest level for six weeks, and the two-year dropped to 4.6%, a level not seen since June.

    • China falls back into deflationary territory. China’s headline inflation figure declined by 0.2% year on year, the fourth month in five that inflation has either been flat or fallen. Food decreased by 4%, the steepest drop for just over two years. Core inflation (excluding energy and food prices) rose by 0.6%, the lowest since June. The producer price index also fell, down by 2.6% on an annual basis in October, marking the thirteenth successive month of falling prices.

    Bloomber table-10-11-23-US.svg

    Source: Bloomberg, November 10, 2023. Prices close of business November 09, 2023.

    Economic calendar

    13 Nov: Germany current account.
    14 Nov: US CPI, UK unemployment, eurozone economic sentiment, Japan (Q3) GDP.
    15 Nov: UK CPI and PPI, US PPI and retail sales, China industrial production and retail sales, Japan industrial production.
    16 Nov: US industrial production and initial jobless claims.
    17 Nov: Eurozone CPI, UK retail sales, US housing starts.

    Week to November 03, 2023
    • US bond yields fall after the Federal Reserve keeps rates unchanged. US Treasury yields declined both before and after the Fed’s policy meeting, at which policymakers decided to keep interest rates at the same level for the second meeting running. The two-year Treasury yield fell back below 5%, while the 10-year declined to 4.67%. The Fed’s decision encouraged the belief among some investors that rates are already at peak levels, although Fed President Jerome Powell cautioned that inflation was still too high. Treasuries also took comfort from the US Treasury Department’s reduced borrowing estimate for the fourth quarter (of $776bn – previously $852bn), and an indication of a lower long-dated bond auction amount over the following three months.

    • Munis perform well, rallying with Treasuries. High grade muni yields fell by up to 15bp and ratios were unchanged for intermediates, slightly lower in the front end and slightly higher at longer maturities to end at 71% in two-years, 73% in five-years, 74% in 10-years and 92% in 30-years). The primary calendar was very light as issuers were waiting for the Fed’s rate decision. This bolstered the secondary as bid-wanted lists saw strong investor demand and dealer inventories were depleted. Participants were also seeking to add duration. Mutual fund outflows increased significantly to $1.5bn this week but that might not be indicative of current sentiment with moves later in the week. Next week’s calendar is approximately $9bn. The 10-year tax-exempt AAA rated muni yield is 3.44% and a 10-year AA rated taxable muni is yielding around 5.40%.

    • Unexpectedly soft inflation and weaker growth in the Eurozone help push bond yields lower. The eurozone’s inflation data for October featured a marked fall in annual headline inflation to 2.9%, from 4.3%. That surprise drop saw eurozone bond yields decline. Core inflation also fell, dropping to 4.2% from 4.5% in the previous month. The decline in bond yields was also driven by the 0.1% fall in GDP for the third quarter, which again left the eurozone economy on the brink of a recession. Ten-year German government bonds fell to 2.72% but one of the steepest yield declines came in the Italian bond market, where the 10-year BTP fell to 4.62% over the week.

    • Gilt yields fall as the Bank of England (BoE) leaves rates unchanged. Although no change in policy rates was anticipated, gilts strengthened, and yields declined, as the BoE decided against any change to interest rates. It was the second meeting in succession that the BoE had left rates unchanged. However, Governor Andrew Bailey reiterated that interest rates would likely need to stay at high levels for the foreseeable future and indeed could be raised. Medium- and long-dated gilt yields were down, with the 10-year and 30-year yields by almost 20bp over the week, while short-dated bonds fell by less.

    • Japanese government bond (JGB) yields rise towards 1%. The 10-year JGB yield increased to 0.97%, a level not seen since April 2012, as the Bank of Japan (BoJ) – while keeping its monetary policy otherwise unchanged – decided to effectively abandon a rigid cap of 1% on the yield of 10-year JGBs. Significantly, it no longer referred to the limit as a “cap”, but rather as an “upward bound” and stated that it would not strictly police the new limit. However, as the BoJ intervened again in the market to buy JGBs, the 10-year JGB yield fell back to 0.93% at the end of the week.

    Bloomber table-03-11-23-US.svg

    Source: Bloomberg, November 3, 2023. Prices close of business November 2, 2023.

    Economic calendar

    06 Nov: Eurozone composite PMI and investor confidence, Germany factory orders.
    07 Nov: UK retail sales, US trade balance, China trade balance, Australia interest rate decision, eurozone PPI.
    08 Nov: Japan leading economic index and trade balance, eurozone retail sales, Germany CPI.
    09 Nov: China CPI and PPI, US initial jobless claims.
    10 Nov: UK (Q3) GDP, trade balance and industrial production, US consumer sentiment.

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