Fixed income market: the week ahead

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 20^th.

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.