Senior Fixed Income Strategist
Summary: This week take time to watch the primary debt market as more and more low-BBB bonds are issued and spreads tighten. Junk is becoming more and more expensive, while risk continues to be high. In Europe, watch for any news concerning a review of the PEPP program which could trigger volatility in European sovereigns.
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:
22nd September
23rd September
24th September
25th September
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