Fixed income market: the week ahead
Senior Fixed Income Strategist
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.
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.
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
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.