Weekly fixed income review | Insight Investment

• US inflation its highest since 1982.The annual US consumer price inflation rate rose to 7% in December, the highest since mid-1982. Excluding volatile food and energy prices, core inflation was up 5.5%, the highest rate for just over 30 years. The market currently expects four rate hikes in 2022, up from three at the turn of the year, with the first coming in March - Fed funds futures are currently pricing in over 90% likelihood of a hike at that time. Federal Reserve Chairman Jerome Powell said he is prepared to go further to ensure that inflation does not become entrenched over the mid-to-long term. Consequently, the yield on two-year and five-year Treasury yields hit their highest levels for nearly two years, while 10-year Treasury yield gently declined towards 1.7%. Corporate spreads were 4bp wider at 96bp as high issuance and higher rates caused some selling in the secondary market. There was new issuance from Prosus, FS KKR, EIG, RBC, Sonoco and Soc Gen.
  
  
• Bunds move towards positive. The German 10-year Bund yield ended the week close to positive territory at -0.02%, its highest level since May 2019. The rise came as unemployment in the eurozone dropped further in November to 7.2%, the lowest figure since March 2020, and down from October’s 7.3% and the 2021 high of 8.2%. Another positive data point over the week was eurozone industrial production which climbed 2.3% over the month in November following three successive months of contraction.
  
  
• Inflationary pressure in China moderates. Annual consumer price inflation in China declined to 1.5% from 2.3% in the previous month, while the rate of producer price inflation fell from 12.9% to 10.3%. The moderation in prices reflected falling food costs, especially pork prices, as well as some success by the Chinese authorities in improving the procurement of key parts and commodities. The decline led to some speculation that the People’s Bank of China could further loosen monetary policy, following recent cuts to the one-year loan prime rate and major banks’ reserve requirement ratios.
  
  
• World Bank downgrades outlook for global economy. The World Bank expects economic growth to slow from 5.5% in 2021 to 4.1% in 2022, then to 3.2% in 2023, as the lingering effects of the global pandemic persist, leading to a slowdown in the recovery.
  
  
• UK consumer cash levels fall. The rise in the cost of living has reduced UK consumer cash levels to their lowest level in eight years, according to a survey carried out by the insurer Scottish Widows. The survey shows more income is being consumed by rising energy and food costs.

Chart of the Week: Treasuries reprice as rate hike certainty grows

Source: Bloomberg. Data as at January 14, 2022.

Source: Bloomberg, January 14, 2022. Prices close of business January 13, 2022.

Economic calendar

17 January: China retail sales
18 January: UK unemployment, eurozone economic sentiment, Japan industrial production
19 January: UK CPI, PPI and RPI, US housing starts
20 January: Eurozone CPI, Japan CPI, US initial jobless claims
21 January: UK retail sales, UK consumer confidence, eurozone consumer confidence

• Treasury yields rose over the week as the prospect of monetary policy tightening cast a shadow over markets. Bonds sold off in the first full week of the year, as market expectations grew that the US Federal Reserve (Fed) would signal a rate hike as early as March, once the monthly bond-purchasing scheme had been fully tapered. The 10-year bond yield rose above 1.7%, its highest level since April. Minutes released from the December Federal Open Market Committee meeting indicated that policymakers have more clearly converged around the view that inflation pressures will likely be more persistent than had previously been expected and require a more immediate response. A move towards shrinking the Fed’s $8trn-plus balance sheet was also discussed. Additionally, the minutes alluded to the “very tight” labor market, a point underlined by the release of the ADP private jobs report which saw 807,000 new jobs created in the US economy in December, more than double the amount that had been predicted. Meanwhile, daily new cases of COVID-19 in the US exceeded 1m early in the week, a worldwide record for this pandemic.
  
  
• Eurozone bond yields spiked higher. Euro area bond markets sold off in the first week of the new year as fears about monetary policy tightening spooked investors. The release of the Fed’s policy meeting minutes for December clearly indicated a more hawkish mindset among US policymakers. This has come against a backdrop of the European Central Bank (ECB) tapering its Pandemic Emergency Purchase Program and has led to market consensus expectations beginning to indicate an interest rate hike by the ECB later this year. The German 10-year Bund yield rose to -0.05%, its highest level for over two-and-a-half years, while the Italian 10-year BTP yield climbed to 1.3%, its highest level since July 2020.
  
  
• Italy and Slovenia were the first eurozone countries to raise debt in 2022. Italy raised €7bn through a 30-year sovereign debt issue and received €55bn of demand, with investors attracted by an average yield of 2.16%, despite political uncertainty ahead of a presidential election later in the month.  Slovenia raised €1.75bn in short and long-dated paper. Net supply levels are expected to slowly climb through the year, as eurozone nations issue further debt to underwrite fiscal expansion, especially at a time when the ECB is gradually reducing its bond purchases.
  
  
• Chinese property developer Evergrande’s woes continue. Evergrande was reported to have missed payments on another offshore bond, amounting to approximately $250m, while it became apparent that it was also looking to delay payments on an onshore bond issue, issued by a subsidiary. Further, it appears that the company has been ordered to demolish several residential buildings on the resort island of Hainan; this led to the suspension of its shares although trading was reinstated later in the week.

Chart of the Week: the 10-year US Treasury yield rose on the prospect of monetary policy tightening (%)

Source: Bloomberg. Data as at January 7, 2022.

Source: Bloomberg, 7 January 2022. Prices close of business 6 January 2022..

Economic calendar

10 January: Eurozone unemployment and investor confidence
11 January: UK retail sales, Japan leading economic index
12 January: China CPI and PPI, US CPI, eurozone industrial production
13 January: US PPI and initial jobless claims, Japan PPI
14 January: UK industrial production and trade balance, US retail sales and industrial production