Fixed Income Markets: The Week Ahead

Fixed Income Markets: The Week Ahead by Michael McKenna
US CPI numbers, stimulus talks and the ECB President Christine Lagarde’s speeches are going to move the fixed income market this week. Risky assets will continue to be well bid, while volatility might pick up in the emerging markets as China’s economic data are released.

European sovereign yields fell last week with the periphery leading the way. We expect this trend to continue throughout this week as the ECB President Christine Lagarde speaks today, Wednesday and Thursday. Expectations on more stimulus are rising as the central bank appears to be worried about a slow recovery and continuous rise in Covid-19 cases. We believe that European sovereigns will continue to rise at least until the end of the year with Italian BTPs gaining the most.

In the meantime, Brexit will continue to generate noise. Even though October 15th marks the end of the Brexit talks, it seems that the two parties are looking to extend the deadline for at least a month. On the back of this news, the market looked happy as the FTSE closed +2% up last week and cable moving to 1.3035 from the recent low of 1.2675.

Stimulus talks continue to be chaotic in the US; however, the S&P closed almost 4% higher at the end of last week as Trump opened up about the stimulus package. Risky assets also rose with the iShares iBoxx USD High Yield Corporate Bond fund (HYG:arcx) closing around 1.5% higher last week. Refer to our article to understand what is happening with Treasuries and why we expect a further steepening of the yield curve. This week’s US inflation numbers might contribute to a further rise of 30-year Treasury yields. For those that want to position to take advantage of volatility, we believe that the 5s30s spread might give better insight to inflation than the 2s10s spread.

In the Saxo Platform, one can find the Lyxor US Steepening (STPU:xmil) which lets investors taking advantage of the steepening of the yield curve between 2 to 10 years. Otherwise, one can get exposures to longer-term maturities through CFDs tracking bond futures such as 30YUSTBONDDEC20, which tracks the 30-year US T-Bond future with December 2020 expiry.

Finally, we will be observing the emerging markets, especially China, as it releases several economic figures. The country is dealing with a default scare coming from the largest real estate group in the country, Evergrande. Even though the People’s of China will not allow such a large scale default, weaker than expected economic data may trigger a selloff in the emerging market world.  We continue to be skeptical of the Sub-Saharan region and Turkey.

Main events to watch out for this week:

Monday 12th of October

  • Eurozone: ECB President Lagarde speaks
  •  China: Vehicle Sales, Outstanding Loan Growth, M2 Money Supply YoY
  • Indonesia: Interest Rate decision

Tuesday13th Of October

  • China: Balance of Trade
  • Germany: Inflation Rate
  • United Kingdom: Unemployment Rate
  • Eurozone: ZEW Economic Sentiment Index, General Affairs Council meeting
  • Italy: 3, 7 and 30-year BTPs Auction
  • United States: NFIB Business Optimism, CPI numbers
  • Australia: Consumer Confidence

Wednesday14th of October

  • Eurozone: ECB President Lagarde speaks, Industrial Production
  • United States: PPI numbers, MBA Mortgage Applications, IMF/World Bank virtual annual meeting
  • Argentina: Inflation Rate

Thursday15th of October

  • Australia Unemployment Rate, Consumer Inflation Expectations
  • China: Inflation rate
  • France: 3 and 5-year BTAN Auction
  • Spain: 5-year Bonos Auction
  • United States: Initial Jobless Claims
  • Eurozone: ECB President Lagarde speaks

Friday16th of October

  • Eurozone: Balance of Trade, inflation rate, European Council Meeting
  • United States: Retail Sales, Industrial Production
Topics: Bonds Government Bonds China Portugal Emerging Markets United States United Kingdom Brexit Italy Germany Indonesia Argentina