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    Weekly fixed income review: November

    November 29, 2019 Fixed income
    Week to November 29, 2019
    • It was a quiet week in US bond markets due to the Thanksgiving holiday. Market sentiment was buoyed early in the week as signs suggested the US and China were edging closer to a trade deal. The Chinese government said that China and the US “reached consensus on properly resolving relevant issues”; however, this was called into question mid-week as President Trump signed legislation expressing support for Hong Kong protesters. China’s Foreign Ministry said the country will take “strong counter measures” if the US continues in this way. On the data front, US data surprised to the upside, with Q3 GDP revised upwards to 2.1% from 1.9%, helped by inventories, business sentiment and slightly stronger consumer data. Treasuries were largely flat with the 10-year yield down c.1bp.
    • European government bond markets were also quiet, bar a widening in Italian spreads. In eurozone data, the preliminary inflation estimate rose to 1.0% year-on-year (versus 0.9% expected) and the seasonally-adjusted unemployment rate fell to 7.5% in October 2019, in line with expectations. In Germany, monthly retail sales declined by 1.9%, the biggest monthly drop in retail trade since December 2018. The yield on the 10-year bund was largely unchanged, falling by c.1bp, and other European markets were largely unmoved. Bucking the trend, 10-year Italian spreads widened by around 6bp, owing in part to technical supply, although idiosyncratic stories – such as ongoing talks between the government and steelmaker ArcelorMittal over the Ilva steel plant – may also be playing a role. In the UK, the highly-anticipated YouGov MRP poll indicated a comfortable 11-point lead for the Conservative Party, though it also indicated that if the lead diminishes to seven points, a hung parliament is possible. The yield on 10-year gilts fell by c.4bp.
    • European credit had a strong week, with good liquidity and strong demand. Several deals came to market, including a UK supermarket and a UK utility, with new issues performing well in the secondary market.
    • Chile’s worst social unrest in a decade contributed to volatility across Latin American markets. The Chilean peso slumped before rebounding on Friday as the country’s central bank said it would intervene, vowing to sell up to $10bn on the spot market. Other Latin American currencies have also been weakening on the back of the political turmoil, including the Brazilian real and Colombian peso.

    Chart of the Week: Chilean peso spot rate suffers amid protests, before rebounding on central bank support

    Chart of the week

    Source: Bloomberg. Data as at November 29, 2019.

    Bloomberg stats for 29 Nov 2019

    Source: Bloomberg, November 29, 2019

    Economic calendar

    • Monday: November manufacturing PMIs from US, euro area, France, Germany, Italy, UK; US November ISM manufacturing, October construction spending
    • Tuesday: Euro area October PPI; Australia final November services and composite PMIs
    • Wednesday: November services and composite PMIs in US, euro area, France, Germany, Italy and UK; US weekly MBA mortgage applications, ISM non-manufacturing index; Australia Q3 GDP
    • Thursday: Germany October factory orders, November construction PMI; euro area October retail sales, final Q3 employment, GDP; US weekly initial jobless claims, October trade balance, factory orders, final October durable goods orders,
    • Friday: US November nonfarm payrolls, unemployment rate, average hourly earnings, final October wholesale inventories; Germany October industrial production; France October trade balance; Italy October retail sales
    Week to November 22, 2019
    • US Treasury yields continued to outperform other developed market government bonds across the curve, amid a backdrop of continued geopolitical uncertainty and stuttering economic data. Over the last two weeks, 30-year yields have declined by almost 20bp, and 10-year yields by c.15bp. On the geopolitical front, the US-China Phase 1 deal has yet to be agreed and, despite some positive utterances from both sides, the prospect of an agreement remains clouded in uncertainty. Additionally, the US Senate unanimously passed legislation aimed at protecting human rights in Hong Kong – a development that prompted anger in Beijing which branded it a “whitewash”. Recent data prints for the US economy have disappointed, dragging growth estimates lower. US retailers came under pressure after some of the largest names in the sector – including Kohl’s Home Depot and Urban Outfitters – posted disappointing results.
    • China’s central bank implemented a fresh round of policy easing, as China’s economy remains under pressure amid slowing demand and uncertainty linked to the ongoing US-China trade spat. The People’s Bank of China (PBOC) cut the seven-day reverse repo rate by 5bp to 2.50% – the first such cut in four years – and followed this up by lowering its new benchmark lending rate, the 1-year loan prime rate, by 5bp to 4.15%. These cuts came after PBOC Governor Yi Gang announced that Beijing would increase efforts to provide credit support and lower real lending rates in the economy. The cuts prompted speculation that this marks an inflection as the start of a new easing cycle.
    • German bund yields reached three-week lows as heightened concerns over the direction of US-China trade talks encouraged flows to safe-haven assets. The 10-year bund yield fell to -0.36%, 14bp below five-month highs hit earlier this month. Peripheral eurozone bonds moved in the opposite direction over the week. Italian bonds, in particular, rose sharply mid-week, driven by a combination of renewed political uncertainty in southern Europe, profit-taking by foreign investors and concerns that European Central Bank stimulus measures are reaching their limits. In the UK, the general election campaign continued, and Prime Minister Boris Johnson and opposition leader Jeremy Corbyn took part in a televised debate. Johnson doubled down on his Brexit promises, arguing only he could implement Brexit quickly. Polls after the hour-long debate showed the public was split over the victor.
    • US corporate spreads widened marginally by 3bp to 109bp over the week as ongoing uncertainty in trade headlines continues to keep investors cautious. Recent new issuance has caused some indigestion in the market as dealer balance sheets have grown larger and Asian buying has been muted. There were deals from Dominion, Centene, Deutsche Bank, Teva, Las Vegas Sands and Diamond Bank. European credit markets generally traded weaker, prompting spreads to widen.

    Chart of the Week: US 30-year yields have fallen amid geopolitical uncertainty and stuttering economic data


    Source: Bloomberg. Data as at November 22, 2019.


    Source: Bloomberg, November 22, 2019

    Economic calendar

    • November 25: German IFO data
    • November 26: US Fed Chair Powell speech
    • November 27: UK inflation report hearings
    • November 28: Eurozone CPI
    • November 29: Eurozone unemployment
    Week to November 15, 2019
    • In the US, 10-year Treasury yields fell by c.11bp. Early in the week, President Trump indicated a deal with China could happen soon, before adding that tariffs would be “substantially” raised if a deal was not made. China’s Ministry of Commerce indicated yesterday that removing existing additional tariffs is an important condition for reaching a deal. On the data front, US retail sales increased by 0.3% in October, a slight beat on consensus of 0.2%.
    • In US credit, risk appetite remained broadly positive, even amid more mixed trade headlines. Issuance remained strong, with the fourth-largest deal in history, at $30bn, being brought by a US pharmaceutical. Easy Federal Reserve policy and a better economic backdrop seem to be helping to push spreads tighter into year-end.
    • Core European government bond yields fell, with 10-year bund yields decreasing by c.8bp. Germany surprised markets by avoiding a technical recession in Q3, with data showing +0.1% growth (versus -0.1% expected). Meanwhile, spreads widened on the periphery amid political uncertainty in Spain and Italy: 10-year Spanish and Italian spreads over bunds widened by c.14bp and c.17bp respectively. In Spain, the Spanish Socialist Workers’ party won the country’s fourth general election in as many years, but failed to secure a majority, leading the party to agree a preliminary coalition deal with anti-austerity party Unidas Podemos.
    • In European credit, the primary market was busy, with companies continuing to issue debt before the traditional seasonal slowdown in December. Peripheral issuers underperformed given the geopolitical backdrop.
    • Campaigning for the UK’s December general election began in earnest, with polls indicating a comfortable majority for the Conservative Party. Brexit Party leader Nigel Farage said his party would not stand in seats won by Conservatives in the last election, arguably shifting the balance further in favor of the Conservatives. Yields on 10-year gilts fell by around 6bp.
    • In emerging markets,central banks in Egypt and Mexico followed the trend to ease monetary policy and cut rates. Meanwhile, ongoing demonstrations in Hong Kong turned increasingly violent. Economic data from China came in weaker than expected, with aggregate financing in October totaling CNY619bn yuan (versus CNY950bn expected).

    Chart of the Week: Germany avoids a technical recession in Q3, with +0.1% GDP reading

    Chart of the week

    Source: Bloomberg. Data as at November 15, 2019.

    Bloomberg stats 15 Nov

    Source: Bloomberg, November 15, 2019

    Economic calendar

    • Tuesday: US October building permits, housing starts; euro area September construction output; Italy September industrial sales, industrial orders; Japan October trade balance
    • Wednesday: US weekly MBA mortgage applications; Germany October PPI
    • Thursday: US weekly initial jobless claims, October leading index, existing home sales; euro area advance November consumer confidence; France November business confidence, manufacturing confidence; UK October public sector net borrowing; Japan October nationwide CPI
    • Friday: Preliminary November manufacturing, services and composite PMIs in US, euro area, France, Germany, Japan; Germany final Q3 GDP
    Week to November 8, 2019
    • US Treasuries sold off during the week as investors reacted to positive developments in US/China relations. The 10-year Treasury jumped 15bp on Thursday, its biggest single-day move since the election of President Trump, on the back of reports that the US and China have agreed to remove tariffs in phases. The yield on the 10-year note ended the week 22bp higher, while the 30-year was up 21bp.
    • In US credit markets, corporate spreads tightened as positive trade headlines and economic data (particularly the strong jobs report) continue to boost risk appetite. We could be seeing a return of the ‘Goldilocks’ period if easy Federal Reserve policy and an improving economic backdrop combine to help push spreads tighter into year end. There were deals from Domino’s Pizza, Consolidated Edison, Nordstrom and Cheniere.
    • European government bond yields rose as sovereign yields across the board also reacted to the more optimistic trade outlook. Yields on the French 10-year benchmark note moved above 0% for the first time since the summer, rising 12bp to 0.05% (see chart below). Belgian, Finnish and Austrian yields also moved closer to positive territory while German bunds climbed 14bp to -0.25%.
    • The Bank of England did not change the base rate, but lowered its inflation outlook, now forecasting CPI to remain below the bank’s 2% target until mid-2021. This is based on current market expectations of a single rate cut. If rates are unchanged – the majority view of the central bank’s Monetary Policy Committee – CPI is forecast to remain below 2% until mid-2022.
    • European corporate bond issuance year-to-date has surpassed the €1.8tn annual record set in 2017, with €12bn of new bond sales from companies including Apple and Bayer on Thursday. However, there are signs that the market for euro-denominated bonds may be saturated as new sales from Bollore and Nykredit Realkredit were postponed.

    Chart of the Week: The yield on 10-year French debt moves above zero (%)

    Chart of the Week The yield on 10-year French debt moves above zero (%)_8.11.2019_NA

    Source: Bloomberg. Data as at November 8, 2019.

    Bloomberg statistics_08_Nov_2019_NA 

    Source: Bloomberg, November 8, 2019

    Economic calendar

    • November 11: UK GDP
    • November 12: UK unemployment, EU ZEW Economic Sentiment Index
    • November 13: German inflation, UK inflation, EU industrial production
    • November 14: US unemployment, EU GDP, German GDP
    • November 15: US retail sales, EU inflation
    Week to November 1, 2019
    • The Federal Open Market Committee (FOMC) cut the benchmark Federal Funds Rate by 25bp to a range of 1.5% to 1.75%, consistent with market expectations. Notable was the removal of a key clause that previously stated it was committed to “act as appropriate to sustain the expansion”, indicating that the Federal Reserve (Fed) may pause further rate cuts. Two members of the FOMC voted against the rate cut – Esther George of Kansas City, and Eric Rosengren of Boston.
    • The Brazilian real reached 11-week highs, following an apparent hawkish shift in the Banco Central do Brasil’s (BCB) monetary policy outlook, despite inflation continuing to print below target. The BCB nonetheless cut its benchmark Selic interest rate to a new record low of 5.00%, as expected on Wednesday. The Mexican peso softened over the week after data showed that the economy slowed in the third quarter, falling short of investor forecasts.
    • Japanese government bonds held steady over the week after the Bank of Japan decided not to change current policy targets of -0.1% for short-term interest rates and 0% for 10-year bond yields, while tweaking its forward policy outlook. While the announcement had little impact on Japanese bonds, the market derived support from the rally in US bonds that occurred after the Fed cut interest rates for the third time this year.
    • Tax revenues in Germany are expected to end the year 4 billion euros higher than previously estimated, the German finance ministry announced. This improved forecast comes despite a slowdown in the German economy, and will likely apply pressure on the government to use greater fiscal measures to counter economic weakness. Incoming European Central Bank President, Christine Lagarde called on Germany and the Netherlands to make greater use of fiscal measures to stimulate their respective economies, stating “those that have the room for manoeuvre, those that have a budget surplus, that’s to say Germany, the Netherlands, why not use that budget surplus and invest in infrastructure? Why not invest in education? Why not invest in innovation, to allow for a better rebalancing?”
    • In US credit while corporate spreads marginally tightened, the combination of both a return of corporate supply and a hawkish tone from Fed chairman Powell began to weigh on risk sentiment. Amid a rise in new issuance, dealer inventories rose by $10bn this week as investors made room in their portfolio for these deals as well as over $40bn in the first two weeks of November. There were deals from Comcast, Braskem and Ashtead amongst others.

    Chart of the Week: The Brazilian real reached 11-week highs after the BCB turned hawkish

    Chart of the Week The Brazilian real reached 11-week highs after the BCB turned hawkish_01.11.2019_NA

    Source: Bloomberg. Data as at November 1, 2019.

    Bloomberg statistics_01_Nov_2019_NA 

    Source: Bloomberg, November 1, 2019

    Economic calendar

    • 4 November: European market manufacturing PMI
    • 5 November: Australia interest rate decision
    • 6 November: European retail sales
    • 7 November: UK Bank of England interest rate decision
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