Fixed income market: the week ahead

Bonds
Althea Spinozzi

Fixed Income Strategist

ContentHub.Articles.Summary:  It doesn't feel right waking up to Christmas week looking at the US yield curve steepening like a bad omen as the stock market is at an all-time high. The 2s10s spread has been widening to 2017 levels last week. Both the Global Financial Crisis and the Dot Com bubble have been preceded by a steepening of the yield curve. We expect yields to continue rise this week amid the vote of the $900 billion pandemic relief plan and the 20-year Treasury auction expected today. In the United Kingdom, 10-year Gilt yields may test the 0.10% benchmark bank rate as a new strain of Covid-19 has been found, and an agreement has not been reached regarding Brexit. Last Friday, BOE's Vlieghe said that the UK might need subzero rates leaving room for yields to continue to fall.


This week is going to be a short one with the market on Christmas holidays starting from Thursday. Yet, the financial market is giving signals that this might be the calm before the storm.

In the US the yield curve continues to steepen even though the 10-year yields are yet to break the pivotal 1% level. The spread between the 2- and 10- year yields at the end of last week rose to 82 basis points, a level last seen in October of 2017. The 5s30s spread has been widening steadily this year, to reach a level last seen at the end of 2016.

Adding pressure to rising yields this week it is the vote on the $900 billion pandemic relief plan as well as today's 20-year Treasury auction. Even though we expect the bonds to be well received, there is a chance for a weaker bid-to-cover ratio, caused by lower liquidity due to Christmas festivities. Thus, we might see yields pointing higher even though investors get ready to pop their champagne! We believe that at this point, the steepening of the yield curve cannot be dismissed even if yields are still trading at historic low levels. The steepening of the yield curve preceded the 2008 Global Financial Crises as well as the dot com bubble. Seeing the stock market ever high together with the yield curve steepening flashes all the warning signs.

Caption: Nasdaq Index and 5s30s US yield spread. In red are highlighted recessionary environments. Source: Bloomberg.

In the United Kingdom,  the appearance of a new strain of highly contagious Covid-19 virus adds on the uncertainties of a Brexit deal. The 10-year Gilt yields this morning have broken their support line at 0.20%, and they are descending towards the 0.10% benchmark bank rate. Last Friday Vlieghe, a BOE MPC member, said that the UK might need subzero rates for a full recovery. That's why in the next few weeks if a Brexit deal is not signed and the Covid-19 situation worsens we could see 10-year yields dipping below 0.10%.

In terms of data, we have gross domestic product figures coming out from several countries, which can also contribute to sovereign sentiment if they are worst than expected.

In conclusion, don't get too comfortable with the Christmas lull this year as it seems that the market is trading on a fine line.

Economic Calendar:

Monday, the 21st of December

  • China: PBoC Interest rate Decision
  • Italy: Trade Balance
  • United States: Chicago Fed National Activity Index, US Treasury to auction 20-year bonds
  • Eurozone: Consumer Confidence

Tuesday, the 22nd of December

  • Australia: Retail Sales
  • United Kingdom: Gross Domestic Product
  • Germany: Gfk Consumer Confidence Survey
  • United States: Gross Domestic Product Annualized, Core Personal Consumption Expenditures, Core Personal Consumption Prices
  • Japan: BoJ Monetary Policy Meeting Minutes

Wednesday, the 23rd of December

  • Australia: Trade Balance
  • Japan: Leading Economic Index
  • United States: Durable Goods Orders, Nondefence Capital Foods Orders ex Aircraft, Personal Spending, Initial Jobless Claims 4-week average, Michigan Consumer Sentiment, US Treasury to auction 5-year TIPS
  • Canada: Gross Domestic Product
  • Switzerland: SNB Quarterly Bulletin

Thursday, the 24th of December – Christmas Day

  • Japan: Tokyo Consumer Price Index, Unemployment Rate, Retail Rate

Friday, the 15th of December – Christmas Day

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
Zürich
Switzerland

Contact Saxo

General.SelectRegion

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 series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed here or 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.