Our fixed income team provide their update of recent market events
Are we approaching the end of a rate cutting cycle? There does appear to be a dampening of several key themes, reflected in the dollar finally plateauing a little after a tumultuous 12 months. Read on for a breakdown of fixed income news across sectors and regions.
Macro/government bonds
US and eurozone bond yields were broadly unchanged during the week. Only in the UK did we see more pronounced upward pressure on yields. On the week, the yield on the US 10-year rose 2bps to 4.10%, the German 10-year rose 3bps to 2.67%, and the UK 10-year rose 5bps to 4.47%
However, there was volatility during the week. The US 10-year rose 10 bps on Wednesday on the back of buoyant ISM services data. However, the following day Challenger Jobs data revealed 153,000 cuts in October. It was the highest reading in more than two decades. The US 10-year declined by 8bps on the day in response.
One of the challenges for US policymakers and market participants continues to be the reduced level of economic data during the shutdown. On Sunday it emerged that a moderate group of Democratic senators are willing to support Republican proposals to end the shutdown in return for a vote on health care tax credits.
Turning to interest rates, the Bank of England left rates on hold at 4% in a split 5-4 vote. This gradualist message was a disappointment to the market and exerted upward pressure on gilt yields. The Reserve Bank of Australia left rates on hold at 3.6%, justifying its cautious approach on the recovery in private demand following previous easing and a relatively tight labour market.
Lastly, the Bank of Japan published the minutes of its October meeting, which emphasised a desire to tighten monetary policy sooner rather than later. The market is currently pricing an 84% probability of a quarter point hike by January.
Activity We took partial profits on our long position in the gilt market.
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.
