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    Weekly fixed income review: October

    Weekly fixed income review: October

    October 30, 2020 Fixed income
    Week to October 30, 2020
    • The volatility index (VIX) spiked higher as global equities fell sharply. COVID-19 numbers in the US hit a record daily high of 91,000 cases on Thursday bringing fear to markets. The VIX, often referred to as the ‘fear index’, spiked higher to levels not seen for over four months as equity markets tumbled. The presidential election and a lack of clarity over further fiscal stimulus, that had seemed certain a few weeks ago, was a further negative. The 10-year Treasury yield fell steadily over the week, from recent four-month highs, while the S&P 500 Index fell even more sharply, notching up a 4.5% loss. By contrast corporate spreads were more resilient widening only 2bp to 125bp. There was minimal new issue activity going into the election, with deals from a computer manufacturer and a tool and hardware manufacturer.

    • German bond yields fall. The number of new COVID-19 cases in Germany has also risen substantially leading to a decline in the German consumer confidence and investor sentiment indicators. The 10-year German Bund yield fell to -0.64%, its lowest level in over six months. Government bond yields also fell in other key European markets,such as France and Italy, as investors sought out safe-havens, with a marked shift from equities to bonds.

    • The European Central Bank kept interest rates unchanged but indicated that more stimulus was ready to be launched, potentially as soon as December. At the October policy meeting of the European Central Bank, President Christine Lagarde indicated that the bank was considering extra stimulus measures in order to boost growth and reignite inflation. Headline consumer inflation has now been negative for three consecutive months. In contrast, GDP growth for the third quarter expanded 12.7% from the previous period as lockdown restrictions were eased; however, their recent re-imposition is expected to cause a slowdown in the fourth quarter.

    • Japanese life insurers return to buying domestic bonds.  A report from Reuters, based on interviews with major Japanese life insurers, has indicated a trend away from foreign currency-denominated debt into Japanese domestic debt. The cause is the fall in the relative yield gap between foreign and domestic debt yields, following a fall in yields in most overseas bond markets as Japanese bond yields have been relatively steady, especially at the long end of the yield curve.

     Chart of the Week: S&P500 volatility spikes due to second wave

    Chart of the Week: S&P500 volatility spikes due to second wave

    Source: Bloomberg. The Chicago Board Options Exchange's CBOE Volatility Index (VIX). Data as at 30 October 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 125bp +2
    Bloomberg Barclays Euro Corporate Index 116bp +5
    Bloomberg Barclays Sterling Non Gilts Index 120bp +2
    Bloomberg Barclays US Corporate High Yield Index 507bp +39
    Bloomberg Barclays Pan-European High Yield Index 481bp +43
    Bond yields (10yr)
    USA 0.82% -2
    Germany -0.64% -6
    Japan 0.03% -1
    UK 0.22% -6
    EquitiesWeek-to-date change
    S&P 500 3,310 -4.5%
    DJ Euro Stoxx 50 2,960 -7.5%
    FTSE 100 5,582 -4.8%
    DAX 11,598 -8.3%
    Nikkei 225 23,332 -0.8%
    Currencies
    EUR/USD 1.17 -1.6%
    JPY/USD 104.61 +0.1
    GBP/USD 1.29 -0.8%
    Commodities
    Brent Crude ($ per barrel) 37.65 -9.9%
    WTI Crude ($ per barrel) 36.17 -9.2%
    Gold ($ per ounce) 1,867.59 -1.8%

    Source: Bloomberg, 30 October 2020. Prices close of business October 29, 2020.

    Economic calendar

    November 02: Manufacturing PMI data for US, UK, Japan and eurozone
    November 03: US factory orders
    November 04: Eurozone unemployment, non-manufacturing PMI data for US, UK and eurozone
    November 05: Eurozone retail sales, US jobless claims
    November 06: US non-farm payrolls, US unemployment

    Week to October 23, 2020
    • There were hopes of fresh US fiscal stimulus. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have apparently made progress in talks about a potential $2trn package, although an agreement seems unlikely before the election. The yield on 10-year US Treasuries rose from 0.75% to 0.86% over the week, the highest level since the start of June. Expectations of an economic recovery, further debt issuance and a convincing Democratic win have combined to push bond yields higher.
    • The EU’s first issue of coronavirus-related bonds saw huge demand. Investors, who were attracted by the instruments’ relatively high (but still negative) yields compared with those on German or French bonds, placed bids for more than €230bn, far exceeding the €17bn of bonds on offer. The bonds are being used to partly fund the EU’s €100bn SURE program (which will provide loans to member states to help them keep workers in employment during the pandemic). Brussels is expected to issue as much as €200bn in debt next year to fund its recently announced €750bn coronavirus recovery package. The yield on 10-year German Bunds rose from -0.63% to -0.57% over the week.
    • The UK government restarted negotiations with the EU over a transitional Brexit trade agreement. After a period in which apparently no progress had been made in talks between the two sides, hopes remain that a compromise will be reached. However, if a deal is finally agreed, it is now likely to be much less wide-ranging than initially expected, given the limited time left to negotiate. The yield on 10-year UK gilts rose from 0.18% to 0.28% over the week while sterling appreciated, moving through 1.30 against the US dollar (also helped by Dave Ramsden, the Bank of England’s deputy governor, saying now was not the right time for negative interest rates in the UK).
    • The UK’s annual inflation rate edged up to 0.5% in September. This was as expected and a slight increase from the near five-year low figure of 0.2% in August. The largest upward contributions were from recreation & culture, transport, and restaurants & hotels (after the end of the government’s ‘Eat Out to Help Out’ scheme). Annual core inflation rose from 0.9% in August to 1.3% in September, again as expected. However, inflation is still well below the Bank of England’s 2% target.
    • China’s third-quarter GDP expanded 4.9% year-on-year. This was less than expected but compared with a rate of 3.2% in the second quarter as economic activity continued to recover from the COVID-19 shock. After a state-backed industrial recovery, the expansion is now extending to consumption: in September, retail sales rose 3.3% year-on-year, their second consecutive monthly increase, as industrial production grew 6.9% year-on-year (the most since December 2019). The yuan is now approaching 6.6 per US dollar, its strongest level since July 2018, supported by firmer guidance from the People’s Bank of China and the recent improvement in domestic economic data.

    Chart of the Week: 10-year US Treasury yields YTD (%)

    Chart of the Week: 10-year US Treasury yields YTD (%)

    Source: Bloomberg. Data as at 23 October 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 123bp -2
    Bloomberg Barclays Euro Corporate Index 111bp -2
    Bloomberg Barclays Sterling Non Gilts Index 119bp -4
    Bloomberg Barclays US Corporate High Yield Index 469bp -2
    Bloomberg Barclays Pan-European High Yield Index 440bp -5
    Bond yields (10yr)
    USA 0.86% +11
    Germany -0.57% +6
    Japan 0.04% +1
    UK 0.28% +10
    EquitiesWeek-to-date change
    S&P 500 3,453 -0.9%
    DJ Euro Stoxx 50 3,171 -2.3%
    FTSE 100 5,786 -2.3%
    DAX 12,543 -2.8%
    Nikkei 225 23,474 0.3%
    Currencies
    EUR/USD 1.18 0.9%
    JPY/USD 104.86 0.5%
    GBP/USD 1.31 1.3%
    Commodities
    Brent Crude ($ per barrel) 42.46 -1.1%
    WTI Crude ($ per barrel) 40.64 -0.6%
    Gold ($ per ounce) 1,904.11 +0.3%

    Source: Bloomberg, 23 October 2020. Prices close of business October 22, 2020.

    Economic calendar

    October 26: Australia trade balance, Germany IFO business sentiment index
    October 27: US durable goods orders, consumer confidence and home prices; ECB bank lending survey
    October 28: Australia CPI, Bank of Canada interest rate decision
    October 29: ECB and Bank of Japan interest rate decisions, US Q3 GDP and weekly jobless claims
    October 30: Euro area CPI, unemployment and Q3 GDP; US PCE inflation, personal income and spending; German retail sales

    Week to October 16, 2020
    • US consumer inflation rose to 1.4% on an annual basis in September. This marked the highest growth rate in the series since March and was also the fourth successive month of acceleration in the inflation rate since it troughed in May at 0.1%. However, US government bond yields fell across the curve over the week, influenced by the likely delay in the announcement of the proposed government stimulus package until after November’s presidential election.
    • US corporate spreads tightened over the week. They fell 2bp to 126bp owing to very strong demand from Asian investors, particularly in Taiwan, over the holiday-shortened week. Bank earnings were largely better than expected, and industrials will begin reporting in earnest next week. There was minimal new issue activity given earnings blackouts, although both Pemex and New York Life Insurance issued.
    • Eurozone government bond yields fell in unison across the region. Boththe 10-year German and French government bond yields fell to their lowest levels in over six months, while the Greek and Italian 10-year bond yields set new all-time lows before recovering modestly. The collective fall reflects investors’ concerns around the economic outlook for the eurozone in the face of a second wave of COVID-19, and the current lack of response from the authorities in terms of providing more stimulus. Additionally, October’s eurozone ZEW Economic Sentiment Indicator fell to its lowest level since May, tumbling from 73.9 to 52.3, reflecting waning confidence towards the bloc’s economy.
    • The Bank of England sounded out banks on the prospect of negative interest rates. The central bank conferred with banks over their readiness to cope with negative interest rates (in a sign that they are moving ever closer), setting a deadline of 12 November for a formal response. At the same time, there are growing expectations that the Bank will raise the size of its monthly bond-purchasing programme, currently set at £745bn.
    • UK unemployment rose to its highest level since May 2017. Unemployment rose to 4.5% in the three months to the end of August, a significant pickup from the previous reading of 4.1% in the three months to July. With the chancellor’s furlough scheme due to finish at the end of the month, being replaced by the less generous job support scheme, unemployment is widely expected to rise much further from current levels. UK government bond yields fell, with that on the 10-year gilt falling to almost 0.15%, the lowest level month to date.
    • China’s first ever direct government bond auction to US investors attracted record demand. The Chinese government issued a $6bn government bond directly to US investors during the week. The issue was more than four times covered, attracting $27bn of orders, as investors looked to lock into the higher relative yields on offer across a range of maturities.

    Chart of the Week: Italian 10-year bond yields

    Chart of the Week: Italian 10-year bond yields

    Source: Bloomberg. Data as at 16 October 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 126bp -2
    Bloomberg Barclays Euro Corporate Index 111bp -1
    Bloomberg Barclays Sterling Non Gilts Index 121bp -1
    Bloomberg Barclays US Corporate High Yield Index 465bp -9
    Bloomberg Barclays Pan-European High Yield Index 430bp 0
    Bond yields (10yr)
    USA 0.73% -6
    Germany -0.58% -6
    Japan 0.03% -1
    UK 0.22% -7
    EquitiesWeek-to-date change
    S&P 500 3,489 +1.2%
    DJ Euro Stoxx 50 3,273 +0.5%
    FTSE 100 5,935 -0.7%
    DAX 13,028 -0.1%
    Nikkei 225 23,627 -0.1%
    Currencies
    EUR/USD 1.17 -0.1%
    JPY/USD 105.17 +0.8%
    GBP/USD 1.30 +0.6%
    Commodities
    Brent Crude ($ per barrel) 43.32 0.0%
    WTI Crude ($ per barrel) 41.04 -0.4%
    Gold ($ per ounce) 1,901.52 +0.4%

    Source: Bloomberg, 16 October 2020. Prices close of business 15 October 2020.

    Economic calendar

    October 19: China GDP
    October 20: US housing starts, eurozone PPI
    October 21: UK CPI and PPI
    October 22: Eurozone consumer confidence index, US initial jobless claims
    October 23: PMI data for US, UK, Japan and eurozone, UK retail sales

    Week to October 9, 2020
    • Biden's large poll lead and proposed stimulus package boost US stocks and Treasury yields.Two polls in the past week have put Joe Biden over 10 percentage points clear of Donald Trump, which has eased fears of a scenario where Trump would refuse to accept a close-run election loss. Markets were also buoyed by Biden's proposed stimulus package of social security payments; estimates put the size of the stimulus at $1trn to $2trn. Against this backdrop, the US Treasury bond market sold off, with the 10-year Treasury yield rising to its highest level since late May, while the S&P 500 Index rose 2.9%. US credit spreads tightened 6bp to 128bp. Markets will begin to focus on earnings next week, with S&P 500 earnings expected to be down about 22% from last year.
    • The European Central Bank (ECB) considers boosting liquidity levels. In an interview during the week, ECB President Christine Lagarde suggested that flooding the financial system with liquidity was a more appropriate tonic for escaping deflation and boosting economic growth than further interest rate cuts. Although not ruling out further easing, Lagarde stated that her preference was to further increase the supply of liquidity.
    • Italian/German 10-year government bond yield spread tightens. The 10-year German bund yield climbed to -0.49% during the week, before falling back. However, Italian 10-year government yields fell to their lowest level of all time, of just over 0.72%, reducing the spread between German and Italian 10-year government bond yields to approximately 125bp, the tightest level since February.
    • UK GDP slows in August. GDP grew by 2.1% on a month-on-month basis, much lower than had been expected by economists. Most of the growth in August came from the hospitality sector which benefited from Chancellor Rishi Sunak’s program to subsidize eating out. Separately, Bank of England Governor Andrew Bailey warned that the economy was in danger of stalling and that the risks were “very much on the downside”. He called upon banks to inject available liquidity into the economy. UK bond yields, which had risen early in the week, fell towards the end of the period.
    • Japanese government bond yields rose across the curve. The 10-year Japanese government bond yield touched 0.04%, the highest level for a month, while longer-dated bond yields – such as those on 30 and 40-year instruments – rose to their highest levels since early July. Bank of Japan Governor Haruhiko Kuroda stated during the week that fiscal and monetary stimulus was having a positive effect on the Japanese economy. 

    Chart of the Week: US 10-year Treasury yields reach four-month high (%)

    Chart of the Week: US 10-year Treasury yields reach four-month high (%)

    Source: Bloomberg. Data as at 9 October 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 128bp -6
    Bloomberg Barclays Euro Corporate Index 112bp -5
    Bloomberg Barclays Sterling Non Gilts Index 122bp -4
    Bloomberg Barclays US Corporate High Yield Index 474bp -36
    Bloomberg Barclays Pan-European High Yield Index 430bp -19
    Bond yields (10yr)
    USA 0.79% +8
    Germany -0.52% +1
    Japan 0.04% +2
    UK 0.29% +4
    EquitiesWeek-to-date change
    S&P 500 3,447 +2.9%
    DJ Euro Stoxx 50 3,256 +2.0%
    FTSE 100 5,978 +1.3%
    DAX 13,042 +2.8%
    Nikkei 225 23,647 +2.7%
    Currencies
    EUR/USD 1.18 +0.4%
    JPY/USD 106.03 -0.7%
    GBP/USD 1.29 0.0%
    Commodities
    Brent Crude ($ per barrel) 43.34 +10.4%
    WTI Crude ($ per barrel) 41.19 +11.2%
    Gold ($ per ounce) 1,893.82 -0.3%

    Source: Bloomberg, 09 October 2020. Prices close of business 08 October 2020.

    Economic calendar

    12 October: UK retail sales
    13 October: Eurozone CPI, US CPI, eurozone economic sentiment survey
    14 October: Japan industrial production
    15 October: US jobless claims, US Philly Fed survey, eurozone industrial orders
    16 October: US retail sales, US Michigan consumer sentiment index

    Week to October 2, 2020
    • The European Central Bank (ECB) is considering targeting an average inflation rate. At a conference in Frankfurt during the week, ECB President Christine Lagarde talked of the ECB following the US Federal Reserve’s lead in allowing monetary stimulus to remain loose until inflation recovers above the ECB’s targeted rate of “below, but close to, 2%.” This would potentially allow the inflation rate to spike above 2% for a sustained period, in an effort by the central bank to get inflation more sustainably entrenched in the economy. Her comments reignited speculation that the ECB might intensify its monetary stimulus efforts in the near-future.
    • In the US, there was increasing speculation of a further imminent boost to fiscal spending. Insiders suggested that the Democrats and Republicans had managed to agree on the details around a further package of measures to help businesses and individuals, and boost the economy, with a proposed budget in the region of $2trn. This would be a significant addition to the previous spending commitments already made by the US authorities, since the Covid-19 crisis began. Government bond yields jumped across the curve towards the end of the week, before falling back.
    • The UK’s second-quarter GDP decline was less than initially reported. The original figure of a quarterly fall of 20.4% in the UK economy, in the second quarter of 2020, was revised to a fall of 19.8%. This still marked the most severe contraction since records began in 1955 and was the worst figure reported among major developed economies. Gilts sold off over the week, with the 10-year yield spiking above 0.27%. At the same time, the Bank of England’s chief economist Andy Haldane stated that “contagious pessimism” was proving to be a hindrance to the UK’s recovery and warned commentators not to talk the economy down.
    • Japan’s Tankan survey showed an improvement. The much-followed indicator, which measures business managers’ outlook for their respective industries, recovered in the September quarter, for the first quarterly improvement in three years. The headline manufacturing diffusion index for large-sized companies rallied from -34 in July to -27, a strong improvement but still well below the zero level which marks the centre point between bullish and bearish expectations over business prospects. Japanese government bonds barely moved on the news.
    • The World Bank forecasts the lowest Asian growth rate for over 50 years. In a sombre assessment of the region’s growth prospects for 2020, the World Bank expects the Asian economy to expand by just 0.9%, which would mark the lowest growth rate since 1967. While the organization expects China to grow, albeit by only 2%, the rest of the region is likely to contract by 3.5%.

    Chart of the Week: Eurozone 5-Year inflation expectations (EUR 5-year inflation swap forward rate %)

    Chart of the Week: Eurozone 5-Year inflation expectations (EUR 5-year inflation swap forward rate %)

    Source: Bloomberg. Data as at 2 October 2020.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 135bp -5
    Bloomberg Barclays Euro Corporate Index 117bp -4
    Bloomberg Barclays Sterling Non Gilts Index 126bp -3
    Bloomberg Barclays US Corporate High Yield Index 510bp -27
    Bloomberg Barclays Pan-European High Yield Index 451bp -18
    Bond yields (10yr)
    USA 0.68% +2
    Germany -0.54% -1
    Japan 0.02% +1
    UK 0.23% +5
    EquitiesWeek-to-date change
    S&P 500 3,381 +2.5%
    DJ Euro Stoxx 50 3,194 +1.8%
    FTSE 100 5,879 +0.6%
    DAX 12,731 +2.1%
    Nikkei 225 23,185 -0.1%
    Currencies
    EUR/USD 1.17 +1.0%
    JPY/USD 105.53 0.0%
    GBP/USD 1.29 +1.1%
    Commodities
    Brent Crude ($ per barrel) 40.93 -2.4%
    WTI Crude ($ per barrel) 38.72 -3.8%
    Gold ($ per ounce) 1,906.01 +2.4%

    Source: Bloomberg, 02 October 2020. Prices close of business October 01, 2020.

    Economic calendar

    October 5: Eurozone retail sales, US composite PMI
    October 6: US trade balance, eurozone factory orders
    October 7: Japan leading economic index, eurozone industrial production
    October 8: US jobless claims
    October 9: UK industrial production, UK trade balance

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