Our fixed income team provide their update of recent market events
From the relationship between democracy scores and flagpole height, to government bond yields and budget machinations, it was a busy week in fixed income. Read on for a roundup of news across sectors and regions.
Macro/government bonds
US and eurozone yields at the 10-year point were 5bps higher on the week, with yields settling at 4.15% and 2.72%, respectively. The yield on the 10-year gilt, in contrast, rose 11bps to 4.57%. This was in response to news that the UK chancellor was backtracking on an intention to raise income tax in the upcoming budget (see below).
In the US we saw an end to the 43-day shutdown as eight democrats agreed to vote with Republicans to reopen government in exchange for a senate vote on extending Obamacare subsidies. Despite the reopening there was still no release of data last week, which could be used to validate the remarks of Federal Reserve (Fed) speakers. It is only this week that we can expect to see the start of data releases, although doubts linger over its quality. Cautious language from senior Fed policymakers caused the market to move from pricing in a 66% probability of a quarter-point rate cut in December to 47%.
We continued to hear the message from from influential policymakers at the European Central Bank, such as executive board member Isabel Schnabel, that eurozone interest rates were in an appropriate space.
In the UK, there were reports last Friday of a U-turn from Rachel Reeves on tax policy. She had been preparing the market, and the wider population, for income tax rises at the Budget, which she would use to create greater fiscal headroom – a message to which gilt market participants had responded positively. The expectation is that she will instead look at numerous small adjustments to the tax regime. An immediate spike higher in gilt yields reflected reduced market confidence in fiscal policy from the governing Labour party.
Positioning We closed a long position in the gilt market ahead of this heightened volatility.
Interested in learning more?
Download the latest edition of ‘In Credit’ for the usual top-to-bottom lowdown including Markets a glance, Chart of the week, and credit sector breakdowns including investment grade, high yield and emerging markets.
