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    Weekly fixed income review: September

    Weekly fixed income review: September

    September 17, 2021 Fixed income
    Week to September 17, 2021
    • US inflation moderated in August: Annual consumer price inflation rose 5.3% year on year in August, down from July’s 13-year high of 5.4%. The rise of 0.3% on a month-on-month basis was the least since January. Annual core inflation, which excludes food and energy prices, slipped from 4.3% in July to 4.0% in August. The fall in inflation caused bond yields to ease a little and gave the US Federal Reserve a little more breathing space regarding tapering, although by the end of the week yields had recovered. In other news, retail sales rebounded in August while initial jobless claims for the week ticked up a little from last week’s pandemic low.

    • German wholesale prices soared in August: They rose by 12.3% on a year-on-year basis in August, the highest growth rate since 1974, reflecting not only base effects but also the severe price pressures coming from the tight supply conditions surrounding many commodities and other raw materials. Nevertheless, Germany’s Ifo Institute released figures during the week that predicted that the pace of inflation would slow in 2022, to 2.0-2.5% from 2021’s estimated 3.0% rate. The 10-year bund yield climbed to a two-month high while other major eurozone government bond yields rose during the week. This coincided with the beginning of quite a heavy period for issuance in the eurozone, with Austria, France and Spain preparing large issues. The German 10-year breakeven inflation rate continued to rise, hovering close to an eight-year high.

    • Inflationary pressures in the UK increased in August: Annual consumer price inflation topped 3.2% in August, higher than had been expected, and the largest increase since March 2012. The jump from July’s 2.0% level represented the biggest monthly jump ever recorded in the series, dating back to 1997. Base effects were the main factor driving inflation, as August 2020 saw a temporary VAT cut for the hospitality sector and the chancellor’s introduction of the ‘Eat Out to Help Out’ scheme. The producer price index also rose at its fastest pace for nearly a decade, up by 5.9% year on year in August. Bottlenecks in supply chains have been largely responsible for driving producer prices higher. Bond yields spiked on the news, with the 10-year gilt yield rising to 0.82%, its highest level since mid-May, as speculation grew that the Bank of England may bring forward potential tapering plans. Short-dated gilt yields rose to their highest levels since the pandemic began in March 2020. Meanwhile, UK employment data continued to improve.

    • Chinese economic statistics continued to disappoint: Nationwide retail sales came in a long way below market forecasts, rising by just 2.5% year on year, the weakest growth rate for 12 months and down from July’s 8.5% increase. Additionally, August’s industrial production figure underwhelmed expectations, rising 5.3% on an annual basis, the slowest rate since July of last year. Rising new cases of COVID-19 across many regions of China have negatively affected business and consumer activity. Meanwhile, fears of financial contagion grew with regard to property developer Evergrande after it applied to suspend its onshore bonds from trading. The People’s Republic of China injected CNY100bn into the banking system through reverse repos in order to boost liquidity. This was the largest injection in over six months.

    Chart of the Week: US CPI year-on-year moderated in August

    Chart of the Week: US CPI year-on-year moderated in August

    Source: Bloomberg. Data as of September 17, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 86bp 0
    Bloomberg Euro Corporate Index 83bp -1
    Bloomberg Sterling Non Gilts Index 86bp -2
    Bloomberg US Corporate High Yield Index 275bp -4
    Bloomberg Pan-European High Yield Index 274bp -8
    Bond yields (10yr)
    USA 1.34% -0
    Germany -0.30% +3
    Japan 0.05% +1
    UK 0.82% +6
    EquitiesWeek-to-date change
    S&P 500 4,474 0.3%
    DJ Euro Stoxx 50 4,170 0.0%
    FTSE 100 7,027 0.0%
    DAX 15,652 0.3%
    Nikkei 225 30,323 -0.2%
    EUR/USD 1.18 -0.5%
    JPY/USD 109.74 0.2%
    GBP/USD 1.38 -0.4%
    Brent Crude ($ per barrel) 75.67 +3.8%
    WTI Crude ($ per barrel) 72.61 +4.1%
    Gold ($ per ounce) 1,754.95 -1.8%

    Source: Bloomberg, September 17, 2021. Prices close of business September 16, 2021.

    Economic calendar

    20 September: German PPI
    21 September: US housing starts, UK public sector borrowing
    22 September: Eurozone consumer confidence
    23 September: US, UK and eurozone PMIs, US initial jobless claims, Japan CPI
    24 September: Japan PMI, German business climate index

    Week to September 10, 2021
    • Investor attention was focused on the European Central Bank (ECB)’s policy committee meeting. Despite slowing the pace of its Pandemic Emergency Purchase Program (PEPP), ECB President Christine Lagarde was keen to stress that speculation of tapering was premature. She stated “the lady isn’t tapering”, a play on a comment from British prime minister Margaret Thatcher who stated, “the lady’s not for turning”. The reaction in government bond markets was muted, but inflation expectations continue to build, with German 10-year breakeven rates (the rate of future inflation at which inflation-linked and nominal bonds generate the same return) rising over the week.

    • The EU announced plans to issue COVID-19 green bonds. As part of the PEPP, the EU stated that it would be issuing COVID-19 green bonds for the first time, potentially from October. Proceeds will be ringfenced for environmentally friendly reforms or sustainable projects. A total green bond budget of €250bn has been touted which would make the EU the largest issuer of this type of bond. Issuance from individual countries has exceeded €200bn this year; during the week, Spain issued a 20-year €5bn green issue, its first-ever green bond issue. It was over 12-times covered, indicative of very strong investor demand for green bonds.

    • The UK government announced a headline national insurance tax rise. Prime minister Boris Johnson faced down meaningful opposition in his party to announce an increase in national insurance and taxes on dividends. These combined measures, to be implemented in April next year, will take the current tax take to its highest level since the second-world war. Sterling fell on the announcement while bond yields generally rose, in part due to Bank of England policy committee member Michael Sanders calling for tighter monetary policy.

    • Talks on raising the US government’s debt limit commenced in Congress. In a seemingly oft-repeated occurrence over the years, Democrats and Republicans began to thrash out the conditions and concessions required to avoid a breach of the national debt limit, with the aim of agreeing to increase it from its current level of $28.5trn. Presently, senior Republicans are opposing an increase in the limit as they may threaten the Democrats $3.5trn ‘reconciliation’ bill which includes measures on social security, education and climate change. While the limit has been exceeded in the past, leaving government workers unpaid, the market is keen to avoid a repeat and the risk of a technical default by the US government (which could occur in late October or early November). The 10-year government bond yield rose to a near two-month high as investors expected, on balance, the US Federal Reserve to begin to wind down its bond-purchasing program in the coming months; this is despite the recent slowdown in job creation and the ongoing Delta variant wave.

    Chart of the Week: German 10-year breakevens rose over the week

    Chart of the Week: German 10-year breakevens rose over the week

    Source: Bloomberg. Data as of September 10, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg Barclays US Corporate Index 87bp -1
    Bloomberg Barclays Euro Corporate Index 86bp 0
    Bloomberg Barclays Sterling Non Gilts Index 88bp 0
    Bloomberg Barclays US Corporate High Yield Index 281bp +2
    Bloomberg Barclays Pan-European High Yield Index 284bp -1
    Bond yields (10yr)
    USA 1.30% -3
    Germany -0.36% 0
    Japan 0.04% 0
    UK 0.74% +2
    EquitiesWeek-to-date change
    S&P 500 4,493 -0.9%
    DJ Euro Stoxx 50 4,177 -0.6%
    FTSE 100 7,024 -1.6%
    DAX 15,623 -1.0%
    Nikkei 225 30,008 3.0%
    EUR/USD 1.18 -0.5%
    JPY/USD 109.72 0.0%
    GBP/USD 1.38 -0.2%
    Brent Crude ($ per barrel) 71.45 -1.6%
    WTI Crude ($ per barrel) 68.14 -1.7%
    Gold ($ per ounce) 1,794 -1.8%

    Source: Bloomberg, September 10, 2021. Prices close of business September 9, 2021.

    Economic calendar

    13 September: US Federal budget balance, Japan PPI
    14 September: UK employment and earnings, US CPI
    15 September: Japan machinery orders, China house prices, industrial production and retail sales, UK CPI, France CPI, Italy CPI
    16 September: UK BoE minutes, US retail sales and Philly Fed Index
    17 September: UK retail sales, Eurozone CPI and current account data, US Michigan consumer sentiment

    Week to September 3, 2021
    • The 10-year Treasury yield remained largely unchanged over the week in low volumes.Weaker consumer confidence and private employment job creation for August, as well as US Federal Reserve Chairman Jerome Powell’s recent relatively dovish comments at the Jackson Hole summit, appeared to reduce fears of an imminent tightening of monetary policy, keeping yields flat. Investors’ attention became increasingly focused on today's release of non-farm payroll and unemployment figures for August, with yields trading in a very tight range.

    • Energy prices help push up eurozone inflation. Rises in energy and food prices and base effects have all been significant factors in global inflation rises this year. In the eurozone energy prices increased by 15.4% year on year in August and the eurozone consumer price index rose by 3.0% year on year, ahead of expectations. It was the highest rise in inflation for nearly 10 years. Annual core inflation, which excludes food and energy prices, came in at 1.6%, the strongest rate of growth since mid-2012. Consequently, government bond yields across the region hit six-week highs following the release of inflation data for August, with the German 10-year bund yield touching –0.35% during the week. In emerging markets such as Brazil, where the food and energy components are greater, inflation rates have been that much higher.

    • The Bank of England appointed a known hawk as its new chief economist and policy committee member. Huw Pill officially replaced Andy Haldane as chief economist during the week. He has previously been vocal in his criticism of excessive monetary stimulus and comes with a reputation of having a hawkish mindset with regard to monetary policy. Major economic releases were few during the week. The 10-year gilt yield rose to nearly 0.7%, its highest level for two months.

    • China sought to further increase liquidity in the financial system and support economic growth. Faced with rising new cases of the Delta strain of COVID-19 and slowing economic growth, the Chinese authorities continued to introduce measures to bolster the economy. This week’s announcement of the manufacturing and services purchasing managers’ indices for August showed contraction in both sectors of the economy and have disappointed relative to expectations. Expectations have arisen of an increase in fiscal spending to battle the economic slowdown. Chinese government bond yields fell over the week, close to the one-year low reached in early August.

    Chart of the Week: base effects, food and energy price rises have all impacted global inflation

    Chart of the Week: base effects, food and energy price rises have all impacted global inflation

    Source: Bloomberg. Data as of September 2, 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
    UK 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, September 3, 2021. Prices close of business September 2, 2021.

    Economic calendar

    06 September: Eurozone investor confidence, German factory orders, UK retail sales
    07 September: China trade balance, eurozone and Japan (final) Q2 GDP
    08 September: US consumer credit
    09 September: China CPI and PPI, US initial jobless claims
    10 September: UK trade balance, UK industrial production, German CPI, US PPI

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