Our fixed income team provide their update of recent market events
As Germany passes its budget, the country is spearheading a new – possibly permanent – era of defence spending by NATO countries. Elsewhere, US and UK government bond yields crept higher. Read on for a breakdown of fixed income news across sectors and regions.
Macro/government bonds
Last week saw a further small rise in yields in the US and the UK. The US 10-year rose 5bps to 4.18%, while the UK 10-year moved 3bps higher to 4.75%. The main trigger was stronger than expected Q2 US GDP, which grew at an annualised rate of 3.8%, exceeding market expectations of 3.3%. The GDP report overshadowed PMI survey data, which pointed to slowing growth momentum and softening demand in the current quarter. Core PCE data came in at 0.2% for August. The relatively restrained inflation report tempered the upwards shift in yields.
The messaging from US policy makers was mixed, ranging from concerns over inflation to the state of the weakening labour market. The lack of coherence around messaging highlighted the current tension between the dual goals of the Federal Reserve’s mandate: full employment and 2% inflation.
Although global factors shaped the upward path for rates in the UK, domestic factors were also at play: Keir Starmer’s position as prime minister came under pressure from the mayor of Manchester, Andy Burnham, who has called for more expansionary fiscal policies. The prospect of a leadership change at a time when UK finances are already challenged exerted upward pressure on gilt yields.
In the eurozone, limited yield movement in the bond market reflected continuing efforts by European Central Bank policymakers to drive home the message that interest rates are close tothe bottom of the cutting cycle. The market sees little likelihood of a further cut to eurozone rates over the next 12 months.
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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.
Positioning: We remain constructive on duration and yield curve steepening strategies in the eurozone and the US, although we have reduced the scale of these positions in recent weeks. We also established a yield curve flattening position in Japan to reflect the recent cheapening in valuations at the long end, alongside the prospect of reduced long-end issuance.