Senior Fixed Income Strategist, Saxo Bank Group
Summary: This week's market focus will be on the Federal Reserve's speakers and the FOMC minutes. The market is trying to find clarity over last week's news that the Fed needs to return unused funds to the Treasury. We might hear central bankers pleading for stimulus as the termination of the Fed's facilities will weight considerably on next year's Q1 economic growth. As a consequence, we could see the US yield curve to continue to flatten. In Europe, the ECB monetary policy meeting accounts might shed some light on how the central bank is planning to ease the economy by the end of the year. In the emerging market space, we could see for the first time since the 90's a Venezuelan company to issue US dollar debt.
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 23rd of November
Tuesday, the 24th of November
Wednesday, the 25th of November
Thursday, the 26th of November
Friday, the 27th of November
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