Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
It is central banks driving gains in the fixed income market, not the U.S. election
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Treasuries weren't the only beneficiaries of the volatility spurred by the U.S. election. Surprisingly, risky assets have been rallying too. U.S. junk credit spreads have tightened significantly while investment-grade spreads are lagging. We believe that investors are buying higher-yielding assets because they expect more support from the Federal Reserve. The same is happening in Europe with Gilts and BTPs tightening considerably compared to peers as investors expect more support from their respective central banks.
Investors are convinced that the market has been trading the U.S. election this week; however, there are signs that central banks have been the real protagonists.
Indeed, while uncertainties around the U.S. election's results pushed Treasuries higher, risky assets didn't lose steam even amid the second wave of coronavirus infections. We, therefore, cannot say that the sudden rise in Treasuries was dictated by risk-off sentiment.
On Wednesday, as a Biden win seemed not as evident, the U.S. yield curve started to flatten with the 10-year Treasuries leading the gains. Yields fell fast across the curve pointing to the perfect risk-off scenario, except that the S&P 500 index was rising as well. The stock market was not alone in the rally; as a matter of facts, credit spreads also tightened considerably with higher-yielding credits leading the way.
In the graph below, we look at the one week change in CDS spreads for various credit sectors. Junk bonds have been leading the gains in credit with health, utilities and energy credits being the best performers. Investment-grade credit spreads have also tightened but modestly compared to high yield spreads.
The price movement in credits shows that even if there is not a clear winner yet, investors have decided to continue to rely upon central banks.
Central banks have been expanding their balance sheet dramatically from the global financial crisis until today. As the economic crisis inflicted by the Covid-19 pandemic intensifies, they will most likely not be able to stop printing money. The outcome will inevitably be near-zero benchmark rates for longer and bigger and bigger bond-buying programmes. They can even contemplate engaging in even more unconventional policies, considering to start to buy other instruments beyond bonds. The Federal Reserve, for example, is already buying ETFs, therefore expanding to stocks would not be that far fetched.
As a consequence, this week, investors decided to put their money at work in assets that will benefit the most from central bank policies. Because junk credit spreads trade rich compared to investment grade's bonds, with the unlimited support of the FED, these are also the assets with the most significant upside. Hence, this explains the rise in junk assets prices.
To strengthen this thesis is the behaviour of European sovereigns that we have seen on Wednesday as a Biden win seemed less likely. Gilts and Italian BTPs have led the rally, and the only explanation for this is that investors were buying the ECB and those assets that will benefit the most from more accommodative policies.
Buying the central bank might be a winning strategy in Europe still; however, it might be too late to buy the FED in the United States especially when talking about Treasuries. Even though the 10-year Breakeven rate has fallen this week supporting the Treasuries' rally, another economic shock coming from the Covid-19 will most likely exacerbate an uptick of inflation. On top of it, the next President of the U.S. regardless of whom will be will need to push through congress a stimulus package. Reflation in 2021 will be real, and near-zero interest rates will be the worst thing you might hold on. In the mid-term, however, there might be scope for more upside within higher-yielding credits, as the Federal Reserve expands its bond purchasing program and tries to save the economy.Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)