Fixed Income Markets: The Week Ahead

It is going to be a light week in terms of central banks’ meetings and government bond auctions.

We believe that the primary bond market will take the spotlight this week as bond issuance pipeline continues to be strong. Last week we saw $42b of new US high-Grade bond issuance, and the vast majority of new bonds have been tightening in the secondary market. Investors' demand continues to be high, and this week we are expecting around $35b of investment-grade notes to be priced. Supply remains skewed towards low-BBB rated bonds, which can suffer from rating downgrades as the risk of a second wave of coronavirus escalates.

Within the junk world, we have also have witnessed to lower-rated CCC bonds to tightened considerably compared to BB and B. This should be a red flag for investors as risk is becoming increasingly more expensive.

We believe that a story published by the Financial Times concerning a possible review of the PEPP’s framework is crucial for fixed income investors looking at European government bonds. Sovereigns from the periphery may suffer if the framework is revised, and future purchases of peripherals need to be limited. However, suppose other asset purchase programs are given the flexibility to invest in the periphery. In that case, we might even see Portuguese and Spanish sovereign yields falling even closer to zero (Yikes!)

Calendar:

22^nd September

• Sweden: Riksbank interest rate decision

23^rd September

• United States, European Union and the United Kingdom: Markit manufacturing, services and composite PMI
• Spain: GDP readings

24^th September

• United States: Powell, Mnuchin Testify Before Senate Banking Committee
• United States: Initial jobless claims
• United States: to sell 50bn 7-year notes
• Italy: To sell bonds

25^th September

• Italy: Consumer and manufacturing confidence index