Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Fixed income market: the week ahead
Althea Spinozzi
Head of Fixed Income Strategy
Summary: This week, watch out for the US employment figures, the Bank of England monetary policy meeting, and news from Italy concerning the government crisis. Ten-year Treasury yields will most likely trade within a tight range between 1% and 1.1% capped by the volatility in the stock market and delays concerning the $1.9 trillion stimulus package. Still, they could test the 1.1% level if nonfarm payrolls surprise on the upside. The Bank of England will most likely leave policy unchanged, but it will be crucial to know whether it is still considering cutting interest rates negative. In Italy, the former coalition's party leaders are meeting today in an attempt to reach an agreement. The name of Draghi has floated around despite President Mattarella saying that there has been no contact with the former ECB's President.
Don't be upset if you have to abandon your skiing plans in light of the Covid-19 restrictions this year; the market is going to give you plenty to watch out for! The second month of the years is starting very busy with the Bank of England’s monetary policy meeting on Thursday and the US employment figures on Friday. On the background, expect Redditors to continue to make noise.
In December, the United States recorded a loss of 140,000 nonfarm payrolls, the first negative figure since April 2020 as the Coronavirus pandemic forced the economy in a lockdown. Although the market expects that 50,000 jobs have been added to the economy in January, the recovery continues to be slow, highlighting the importance of the $1.9 trillion fiscal stimulus plan to pass.
Until these hurdles are not resolved, we can expect US Treasury bonds to trade within a tight range. The 10-year yields will most likely remain above the pivotal 1% level and test the 1.1% level if employment figures surprise on the upside. It is important to highlight that recent developments concerning the Reddit Army also contribute to slow down the rise in yields as uncertainty strikes the stock market.
In the meantime, the US yield curve continues to steepen and this morning the spread between 30- and 5-year Treasury yields briefly rose above 142.5 basis points, the highest since February 2016. We believe that the US yield curve will continue to steepen this week, due to the bullish pressures applied in the front end of the yield curve due to a fall of rates in the repo market. In the next few days, the Treasury General Account (TGA) will disburse benefit payments, supporting the T-bill buying spree the market witnessed last week, which pushed the three-month London interbank offered rate to 0.20500% on Thursday, the lowest since November the 20th.
In Europe, all eyes will be on the Bank of England which faces a hard decision concerning whether to stimulate the economy further as the recent lockdown will inevitably damage the economy increasing the risk of a double-dip recession. Currently, the benchmark interest rate is set at 0.1%, and there have been debates among Monetary Policy Committee members whether to cut it negative with MPC external member Silvana Tenreyro being the biggest supporters of negative interest rates.
Ten-year Gilt yields have been trading within an uptrend channel since last August. However, they have been trying the support line several times showing that yields will not resume their rise unless talks about negative interest rates cease and there is a clear path to recovery, which will follow only after the vaccination is proven effective.
Following Friday's selloff caused by mixed signals coming from the ECB concerning a rate cut, European sovereigns opened higher this morning.
Interestingly, Italian BTPs were among the most resilient government bonds on Friday, hinting to the fact that investors holding these securities are in for the long run looking at the potential spread compression versus the Bund. This morning, the country former coalition's leaders are meeting in an effort to reach an agreement between parties. In the meantime, Mario Draghi's name is floated around by Italy Alive, Matteo Renzi's party, as the perfect substitute of Conte. We believe that if Draghi becomes Italy's Prime Minister, the upside for the BTPs will be substantial in light of the pro-European message that will send to the market.
Economic Calendar
Monday, February the 1st
- Australia: TD Securities Inflation
- China: Caixin Manufacturing PMI
- Germany: Retail Sales
- Switzerland: Retail Sales
- Eurozone: Markit Manufacturing PMI, Unemployment rate
- Italy: Markit Manufacturing PMI, Unemployment
- Spain: Markit Manufacturing PMI
- United Kingdom: Markit Manufacturing PMI
- Canada: Markit Manufacturing PMI
- United States: Markit Manufacturing PMI, ISM Manufacturing PMI, Fed’s Rosengren speech
Tuesday, February the 2nd
- Australia: RBA Interest rate decision and statement
- Japan: 10-year Bond Auction
- Italy: Gross Domestic Product
- Eurozone: Gross Domestic Product
- United States: Fed’s William speech
Wednesday, February the 3rd
- New Zealand: Employment change and rate, Labour Cost
- Australia: Commonwealth Bank Services, Building Permits, RBA’s Governor Lowe speech
- China: Caixin Services PMI
- Spain: Markit Services PMI
- Italy: Markit Services PMI
- Germany: Markit Services PMI
- Eurozone: Markit Services PMI, Markit PMI Composite, Consumer Price Index, Producer Price Index
- United Kingdom: 10-year Bond Auction
- United States: ADP Employment Change, Markit Services PMI, Markit PMI Composite, ISM Service PMI
Thursday, February the 4th
- Australia: Trade Balance
- Spain: 10-year Obligaciones Auction, 3-year Bond Auction, 5-year Bond Auction
- France: 10-year Bond Auction
- Eurozone: Retail Sales
- United Kingdom: Bank of England Monetary Policy Report, BOE minutes and rate decision, BOE’s Bailey speech
- United States: Continuing Jobless claims, nonfarm productivity, Unit Labor Costs
Friday, February the 5th
- Australia: RBA Monetary Policy Statement, Retail Sales
- Japan: Leading Economic Index
- Germany: Factory Orders
- United States: Nonfarm payrolls, Goods and Services Trade Balance, Average Hourly Earnings, U6 Underemployment Rate
- United Kingdom: BOE’s Governor Bailey speech
- Canada: Unemployment rate, Net Change in Employment, Ivey PurchasingManagers Index
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