Fixed Income Markets: the week ahead Fixed Income Markets: the week ahead Fixed Income Markets: the week ahead

Fixed Income Markets: the week ahead

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  In the U.S., the presidential debate and stimulus talks will dictate sentiment in the Treasury market. We will most likely see the U.S. yield curve flatten slightly before resuming its steepening, as volatility rises as we get closer to election results. In Europe, we expect gilts to rise as more uncertainty is added surrounding Brexit talks and coronavirus restrictions are imposed. The periphery will also continue its rally, and we will most likely see Portuguese and Spanish 10-year sovereign yields falling below zero per cent.

This week will be revolving around the last Presidential debate, which is going to be held on Thursday, October the 22nd. The headlines that characterized the past trading week such as negotiations of a U.S. stimulus bill, Brexit talks and rising coronavirus cases will continue to add pressure to a tired market in the midst of corporate earnings' releases.

In the United States, national polls suggest Joe Biden is well ahead of Trump. Still, some expect Trump to come back from behind. This is why this week's presidential debate is important, especially since the previous one was cancelled due to the President contracting Covid-19 and refusing to have a virtual debate.

In terms of credit risk, at this point, the stimulus package is far more important than the U.S. elections. If Biden wins, the country will most likely not see fiscal stimulus until February 2021 adding more pressure to the economy. If that were the case, an increase in corporate defaults would be inevitable, and even though the FED continues to print money, liquidity in the bond market can dry up fast. Since the first wave of coronavirus, however, risky assets have rebounded considerably with High Yield bonds (HYG:xnas) pricing around levels previously seen at the beginning of 2019. If they suffer another blow, we can expect a recovery to be much slower the next time around. In the meantime, as the political and macro environment continues to be uncertain amid, high yield bond sales in the primary will continue to decrease. Last week we saw H.Y. bond sales declining 6% and spreads increasing a couple of basis bonds across the curve.

In Europe, Moody's downgraded the U.K.'s credit rating last Friday. Thus we will see volatility in sterling and gilts to continue to rise as Brexit negotiations intensify. Boris Johnson last week said that Great Britain should get ready for a no-deal. Added to the fact that more restrictions are implemented as coronavirus cases rise, we can expect a worsening of the country's economic conditions that will push safe heaven, gilts, higher. If you want to learn more about this topic, read our gilts analysis published last Friday.

In the meantime, central banks worldwide are telling more of the same:  if needed, they will further ease the economy. The message was particularly well received by the periphery, which rallied exponentially last week. We expect ten year Spanish and Portuguese sovereign yields to fall below zero this week. Within this space, we believe that 30-year BTPs look incredibly rich and poised to tighten faster compared to its peer. We have analyzed spreads in the periphery, and you can learn more about it here.

This week’s calendar:

Monday 18th of October

  • Japan: Trade Balance
  • Australia: RBA Meeting Minutes
  • China: GDP Growth Rate QoQ, Industrial Production, Retail Sales, Unemployment Rate
  • United States: Fed Chair Powell Speech
  • Eurozone: Bundesbank Weidman Speech, Construction Output

Tuesday 19th of October

  • Germany:  PPI
  • United States: Building Permits

Wednesday 20th of October

  • United Kingdom: Inflation Data
  • Eurozone: ECB President Lagarde Speech
  • Canada: Inflation Rate, Retail Sales
  • United States: Fed Beige Book

Thursday 21st of October

  • Germany: GfK Consumer Confidence
  • Turkey: TCMB Interest Rate Decision
  • United Kingdom: BOE Gov Bailey Speech
  • United States: Initial Claims
  • Eurozone: Consumer Confidence Flash
  • United States: Existing Home Sales

Friday 22nd of October

  • Global Manufacturing and Service PMIs Flash
  • New Zealand: Inflation Rate QoQ, Trade Balance numbers
  • United Kingdom: Retail Sales


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