Our fixed income team provide their update of recent market events
The dollar share of global FX reserves declined again in Q3 and, with the US government once again entering shutdown, yields dropped across the curve. Read our weekly snapshot of global fixed income markets.
Macro/government bonds
We saw a drop in yields of around 5bps across the US curve last week. The trigger was the US government shutdown on Wednesday of non-essential services. This was the first time in seven years that a shutdown has occurred and is the third time under President Trump. The Democrats initially sought to use their leverage to extract concessions on greater healthcare spending, which the Republicans rejected. There were also reports the White House intended to use the opportunity provided by the shutdown to make meaningful cuts to federal workers.
The shutdown prevented the publication of non-farm payrolls, at a time when the Federal Reserve’s (Fed) dual mandate (full employment and 2% inflation) is under intense scrutiny. The longer the shutdown, the greater the negative impact on growth. With greater reliance on private sector data, a negative jobs report from ADP, which showed a net decline of 32,000, put downward pressure on US bond yields.
In Europe, yield movements were limited as the president of the European Central Bank, Christine Lagarde, re- emphasised the constrained nature of inflation risk. However, the weekend brought renewed focus on France. President Macron announced a broadly unchanged cabinet, igniting the ire of opposition parties. Prime minister, Sebastien Lecornu, then resigned on 6 October after just 26 days in office. The yield on the French 10-year rose 8bps to 3.59%, while the spread over German bonds of the same maturity reached +0.86% in the morning session of Monday trading.
Other news impacting global bonds over the weekend was the surprise victory in Japan of Sanae Takaichi as leader of the Liberal Democratic Party. Takaichi is regarded as favouring fiscal stimulus, which would have to be financed through greater debt issuance. In Monday trading, the Japanese 30-year increased by +0.14% to 3.29%.
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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.
Portfolio activity We took the defensive measure of increasing the short position in Japan in global mandates.