Fixed income market: the week ahead

Fixed income market: the week ahead by Michael McKenna
This week we expect sovereigns to remain volatile globally. In the United States, investors are still holding on their short bond future positions, but a surge in Covid-19 cases together with President Trump not acknowledging a Biden win is keeping yields from rising. In Europe, there is an upside for the periphery as central bankers discuss the December’s stimulus package. In the United Kingdom, Gilts will trade on Brexit deal news, while a rating downgrade from DBRS Morningstar might push investors to reconsider their positioning in the yield curve.

Treasuries will continue to trade mixed. On one side, the market is pricing a Biden win and positive vaccine developments. On the other hand, we are seeing a rise of Covid-19 infections and limited signs of inflationary pressure which hold Treasury yields from rising.

Federal Reserve Presidents across the country remain concerned about the economy. Stricter lockdown restrictions will limit economic growth holding rates from spiking.  Among many Federal Reserve Presidents’ speeches this week, we believe that the one of Clarida today will be particularly important as he will be commenting on the economy.

We still believe that rising interest rates will continue to be in the spotlight as they might put downside pressure on inflation provoking the intervention of the Federal Reserve. Daily volatility in Treasuries will continue to be high. In the long run, we will most likely see the spread between the 5s30s to continue to widen until it reaches 2016 peak at 140bps. The spread will be mainly moved by the rise of 30-year yields. At the moment the 5s30s is quoting around 123bps.

As Treasuries trade mixed, investors take more risk within the corporate bond space. Year to date, junk bond sales sum up to $387 billion versus $271bn last year over the same period. The option-adjusted spread continues to tighten from the March peak; however, it is still wider compared to where it was at the beginning of the year. It might be one of the reasons why we continue to see junk credits well supported.

In the meantime, in Europe, members of the ECB’s governing council continue to discuss over which instrument to use in December to support the economy from a double-dip recession. Madis Mullers last week said that he sees more scope for ultra-cheap loans rather than an expansion of the Pandemic Emergency Purchase Program (PEPP). Regardless, we still believe that there is scope for European rates to tighten with 30-year Italian BTPs to benefit the most.

Finally, the Brexit saga is far from over. A Brexit deal seems not ready yet, and  DBRS Morningstar has downgraded the United Kingdom’s long term credit rating from AAA to AA last Friday. The rating agency is concerned about the Covid-19 impact on the economy. We believe that Gilts should benefit from it as they provide a safe haven for the sterling.

Economic Calendar:

Monday, November 16th

  • China: Industrial Production, Retail Sales
  • Japan: BpJ’s Masai Speech, Industrial Production
  • Australia: RBA’s Government Lowe Speech and Kent’s Speech
  • United Kingdom: BoE’s Haskel Speech
  • United States: Fed’s Clarida speech

Tuesday, November 17th

  • Australia: RBS Meeting Minutes, RBA’s Governor Lowe Speech, Westpac Leading Index
  • United States: Retail Sales, Industrial Production, Four Fed Presidents speak about racism and the economy
  • United Kingdom: BoE’s Governor Bailey speech, BoE’s Ramsden Speech
  • Japan: Merchandise Trade Balance

Wednesday, November 18th

  • Australia: Wage Price Index
  • United Kingdom: Consumer Price Index, Retail Price Index, PPI Core Output, BoE’s Haldane Speech
  • Eurozone: Consumer Price Index,
  • Germany: 10-year Bond Auction
  • United States Building Permits, Fed’s Williams speech
  • Canada: BoC’s Wilkins speech, BoC Consumer Price Index

Thursday, November 19th

  • Eurozone: EU leaders summit
  • Australia: Employment Change, Unemployment Rate
  • Switzerland: Industrial Production
  • United States: Continuing Jobless Claims, Philadelphia Fed Manufacturing Survey, Initial Jobless Claims, Existing Home Sales
  • Japan: Nationa Consumer Price Index

Friday, November 20th

  • New Zealand: New Zealand General Election
  • Eurozone: G20 Meeting, Consumer Confidence
  • United Kingdom: GfK Consumer Confidence, Retail Sales
  • Australia: Retail Sales
  • China: PBoC Interest Rate Decision
  • Germany: Producer Price Index, German Buba President Weidmann speech
  • Canada: Retail Sales

Saturday, November 21th

  • Eurozone: G20 Meeting
Topics: Bonds Central Banks Federal Reserve Government Bonds Corporate Bonds United Kingdom United States Italy