Fixed income market: the week ahead

Fixed income market: the week ahead

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

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

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.