Fixed income market: the week ahead

Fixed income market: the week ahead

Bonds
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  An environment with elevated inflation and low interest rates is not sustainable. Hence, long term yields need to soar to catch up with price pressures. Following last week's ugly 10 and 30-year US Treasury auctions, Wednesday's less popular 20-year bond sale could be a catalyst for more volatility in the long part of the yield curve. In the UK, we expect Gilts to remain volatile as tomorrow's jobs number might put a brake on interest rate hikes expectations for 2022. Yet, a rally could be short-lived as inflation numbers will be released on Wednesday. Chinese real estate junk bonds show signs of recovery as news suggest the government is working on measures to support developers to tap the debt market. Yet, the sector remains in bad shape amid a slump in property investments.


Wednesday's twenty-year US Treasury auction is in focus as it could spark volatility in the long part of the yield curve.

Interest rate hike expectations continue to be a focus as investors keep their eyes on inflation and economic growth. Although central banks on both sides of the Atlantic appear comfortable sticking to their average inflation-targeting frameworks, investors cannot ignore inflation soaring. The US core CPI hit a 30-year high in October. The spike in energy prices has now leaked to fertilizers, thus food. Households, which are now preparing for Thanksgiving and Christmas, cannot help but look horrified as inflation rates outpace wage growth. Hence, the reason why the Michigan consumer sentiment dropped to a 10-year low this month.

Inflation is now driven by supply-chain disruptions exacerbated by continuous accommodative monetary policies. Hence, investors expect central banks to respond with interest rate hikes to avoid the economy from overheating. As rate hikes expectations advance, yield curves bear flatten as a response.

However, something begins to worry credit markets: it’s becoming clear that an environment with elevated inflation and low interest rates is not sustainable. Many have highlighted that long-term rates remain stable because higher interest rates in the short term might be detrimental to growth in the medium to long term. According to that logic, the yield curve would flatten or even invert as the front part of the yield curve will continue to soar, but long-term yields would barely budge on the prospect that stimulus will shortly be needed for the economy to recover. This idea led many to conclude that the marry goes round continues. If 10-year yields, which are a benchmark for mortgage rates and credit spreads, remain stable, that means that long term borrowings will continue to be cheap.

Yet, last week’s 10-year and 30-year US Treasury auctions sent a troubling message: investors need higher yields across the whole yield curve as inflation keeps rising. A few days after seeing 10-year US yields dropping more than 15bps to 1.41%, yields rose back to 1.56% amid weak demand during the US Treasury auctions. The 20-year tenor is far less popular, suggesting that demand could be even lower than what we saw last week, with the potential to send shockwaves in the long part of the yield curve.

Tomorrow's retail sales will also be in the spotlight; however, they might play a minor role in moving yields.

Source: Bloomberg and Saxo Group.

UK job numbers will provide a compass to understand BOE’s next move.

During the latest Bank of England's meeting, the central bank indicated that it needs more information on the strength of the UK labour market before hiking rates. Wage subsidies ended in September; hence it's critical to see whether that caused unemployment to rise in October. A surprise on the upside in unemployment numbers might lead the market to push back on current rate hike expectations. Despite the recent Gilt rally, investors still expect the BOE to hike four times in 2022, double what is expected in the US. However, a rally might be short-lived as inflation is released on Wednesday and sales figures on Friday.

Overall, we expect Gilts to remain volatile for quite some time. Investors should focus on the Gilt yield curve, which is already inverted between 15 and 30 years. It's in the interest of the BOE to have a steeper yield curve before entering into an interest rate hike cycle to avoid an inversion. Concerning 10-year Gilt yields, they remain in an uptrend. A short-lived rally might see them testing resistance at 0.82%. Still, it's most likely to see them rising above 1% before December's BOE meeting.

Source: Bloomberg and Saxo Group.

China’s economic slowdown is less severe than expected, but the real estate market remains a focus.

The data released from China this morning might also drive sentiment in bonds worldwide this week. In October, consumer spending and Chinese factory activity surprised on the upside, pointing to a less severe economic slowdown than economists were anticipating. However, the slump in property investments and news related to continuous Covid outbreaks are clear signs that it will take longer for the economy to recover fully. Thus, monitoring development relating to the real estate sector crackdown continues to be crucial.

Last week, Chinese real estate junk bonds recovered the most since March 2020 as news spread about the possibility that the government may be working on measures to support developers to tap the debt market. Yet, the sector is not out of the woods, with more than 60% of junk real estate bonds still trading in distressed territory.

The virtual meeting between Joe Biden and Xi Jinping today will also be a focus as markets wonder whether there could be a resolution to the ongoing trading tension.

Source: Bloomberg and Saxo Group.

Economic calendar

Monday, the 15th of November

  • Japan: GDP Growth (Q3), Industrial Production Final YoY (Sept)
  • China: House Price Index (YoY), Industrial Production, Retail Sales, Unemployment Rate (Oct), NBS Press Conference
  • Retail Sales (Oct), Unemployment Rate (Oct)
  • Eurozone: Balance of Trade
  • United States: NY Empire State Manufacturing Index (Nov), 3-month and 6-months Bill Auction

Tuesday, the 16th of November

  • Australia: RBA Meeting Minutes, RBA Gov Lowe Speech
  • Japan: Tertiary Industry Index (Sep)
  • United Kingdom: Employment change, Average Earnings incl. Bonus (Sep) Claimant Count Change (Oct) Unemployment Rate (Sept), 5-year Treasury Gilt Auction
  • France: Inflation Rate YoY Final (Oct), IEA Oil Market Report
  • China: FDI YTD (Oct)
  • Netherlands: GDP Growth Rate
  • Italy: Inflation Rate YoY Final (Oct)
  • Eurozone: GDP Growth Rate (Q3)
  • United States: Retail sales (Oct), Export and Import Prices (Oct), Industrial Production (Oct), Business inventories (Sept), NAHB Housing Market Index, Foreign Bond Investment (Sept), Overall Net Capital Flows (Sept)

Wednesday, the 17th of November

  • Japan: Balance of Trade (Oct), Machinery Orders (Sept)
  • Australia: Westpac Leading Index (Oct). Wage Price Index (Q3)
  • United Kingdom: Inflation Rate (Oct), 10-year Gilt Auction
  • Austria: Inflation Rate (Oct)
  • South Africa: Inflation Rate
  • Italy: Balance of Trade (Sept)
  • Eurozone: Inflation rate (Oct)
  • Germany: 30-year Bund Auction
  • United States: MBA Mortgage Applications, Building Permits (Oct), Housing Start (Oct), 20-year Bond Auction
  • Canada: Inflation Rate (Oct)

Thursday, the 18th of November

  • Japan: Foreign Bond Investment (Nov)
  • Australia: RBA Richards Speech, RBA Ellis Speech
  • Netherlands: Unemployment rate
  • Eurozone: New Car Registrations (Oct)
  • France: 3-year and 5-year BTAN Auction
  • Spain: Sells bonds picking maturity from 3-year to 50-year to be confirmed
  • Portugal: Economic Activity, Private Consumption
  • South Africa: Interest Rate Decision, Building Permits
  • Canada: ADP Employment Change, Foreign Securities Purchases
  • United States: Continuing Jobless Claims (Nov), Initial Jobless Claims (Nov), Jobless Claims 4-week Average (Nov), Philadelphia Fed Manufacturing Index (Nov), CB Leading Index (Nov)

Friday, the 19th of November

  • Japan: Inflation Rate (Oct)
  • United Kingdom: GfK Consumer Confidence (Nov)
  • France: Unemployment Rate
  • Germany: PPI (Oct)
  • United Kingdom: Public Sector Net Borrowing (Oct), Retail Sales (Oct)
  • Eurozone: Current Account
  • Italy: Industrial Sales, Construction Output
  • Canada: New Housing Price Index (Oct), Retail Sales (Sept)

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/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.