Fixed income market: the week ahead

It is going to be a very different Thanksgiving this year. On one side, we have the market fretting about the rise of Covid-19 cases and a lack of stimulus. On the other side, the market is eagerly looking at a reflation trade and the advent of a vaccine. This is why the FOMC minutes this Wednesday will be crucial to understand where to position for year-end. There are speculations that in order to slow down the rise of long term rates, the Fed is looking to include longer duration bonds in its bond-buying program. However, the market is impatiently waiting for clarification over the Fed's programs that are due to expire by year-end. Treasury’s Mnuchin has asked the Fed to return unused funds and to extend, for 90-days, only four facilities. Fed’s Daly speech today and Williams and Clarida’s speeches tomorrow might shed some light on what is going to happen. Once again, we might hear central bankers to plea congress for stimulus. Suppose a deal on stimulus will not be reached; in that case, unemployment benefits are going to be terminated by year-end, weighting on 2021 Q1 economic outlook.

In terms of government bond auctions, we are seeing the Treasury issuing notes with maturity up to 7-years today and tomorrow. Still, we don't expect any particular interference in those auctions as uncertainty should support demand for Treasuries.

Even though Treasury yields fell last week, dragged by the news of a rise in Covid-19 cases and Mnuchin’s requests to the Fed, the reaction of the corporate bond market was muted on Friday. The CDX Investment Grade index, which gauges the riskiness of the higher-rated corporate bond market, rose slightly by the end of the week. The CDX High Yield spread remained stable. Yet, this week corporate bond issuance is slowing down, but desks are pointing to the fact that it is because of Thanksgiving.

On Thursday we have the ECB’s monetary policy meeting accounts of its October’s meeting. Investors are almost certain that the ECB is planning for additional easing before the end of the year. It will be vital to understand which form of stimulus the ECB is considering. In the past few weeks, many pointed to the fact that the central bank might consider expanding the PEPP program, which will ultimately give a boost to the periphery. We continue to be positive over 30-year BTPs as they trade rich compared to peers and they are better positioned to benefit from additional stimulus.

In the emerging market space, the situation is not bright. Moody’s has cut the rating of South Africa’s foreign- and local- debt from Ba1 to Ba2 as it sees the country’s fiscal standing deteriorating. On the other hand, Guatemala has not paid its missed bond payment yet. The country has entered in a grace period which will end next week, failure to make the payment will result in a default. Zambia has defaulted on $42.5 million sovereign bond payment turning into Africa's first sovereign to default in the pandemic era. This week, we might see the first Venezuelan company to issue US dollar debt since the '90s. Ron Santa Teresa is a rum company and the largest of the country planning to allocate in the market $300,000 in commercial papers.

Economic calendar:

Monday, the 23^rd of November

• Eurozone: Markit PMI numbers, ECB’s Schnabel speech
• United Kingdom : Markit PMI numbers
• United States: Markit PMI numbers, Government bond auction for 3- and 6-monht Bills and 2- and 5-year notes, Federal Reserve Daly speech
• Canada: BOC’s Gravell Speech

Tuesday, the 24^th of November

• Australia: Trade Balance, RBA’s Debelle speech
• Germany: GDP numbers, IFO Business Climate
• United Kingdom: BoE’s Haskel speech
• Japan: BoJ’ Kuroda speech
• United States: Housing prices, Consumer Confidence, Williams and Clarida from the Federal Reserve speak, 7-year note auction
• New Zealand: RBNZ’s Governor Orr speaks

Wednesday,  the 25^th of November

• Eurozone: EU Financial Stability review
• Switzerland: ZEW survey
• Untied States: Durable Goods Orders, Core Personal Consumption Expenditures, Gross Domestic Product, Initial Jobless Claims, FOMC Minutes
• United Kingdom: Autumn Forecast Statement

Thursday, the 26^th of November

• United states: Thanksgiving day
• Eurozone: M3 Money Supply, ECB Monetary Policy Meeting accounts
• Japan: Tokyo Consumer Price index

Friday, the 27^th of November

• Germany: German BUBA President Weidmann speech
• Eurozone: Consumer Confidence, Business Climate