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The Fixed Income Brief: Yields At a Crossroad

Rates are being influenced by many factors though one of the main concerns is the pace of global growth and pandemic recovery, particularly as European activity has been slower to rebound.

The Fixed Income Brief: Yields At a Crossroad

Rates are being influenced by many factors though one of the main concerns is the pace of global growth and pandemic recovery, particularly as European activity has been slower to rebound.
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April 23, 2021

Fixed Income Trivia Time:
Who was the President the last time the U.S. public debt was at zero and what year was it?

Where do we go from here? The recent rally in Treasuries surprised a number of fixed income investors who continue to think long rates, given robust growth forecasts, should increase from here. The shift in the recent range on the 10-year Treasury from mid-1.60% to mid-1.50% has not been a huge surprise, but many believe this is simply a holding pattern before a liftoff to an inevitable +1.75% and beyond, and a continuation of a steepening yield curve. The main wildcard here is global growth – which has been substantially hindered by additional virus caseloads and slower vaccination rollouts. For U.S. Treasuries, the global picture is equally important in determining the path of interest rates; the trajectory of the pandemic in large countries like Brazil and India will hold just as much weight for determining the path of rates as U.S. economic data. Overall, the endless number of forces pushing and pulling U.S. interest rates will give in one direction or another, though most investors are betting on higher from here it may not take much to continue to see rates surprise on the downside. Stay tuned.

Data this week was constructively led by another set of decent Markit PMI prints with composites showing continued improvement in both the U.S. and Europe, 62.2 vs 59.7 (March) and 53.7 vs 53.2, respectively. European activity continues to be led by German industrials with the country’s manufacturing PMI remaining elevated at 66.4. The European service sector eked into expansion territory (50.3) for the first time since August 2020, as Europe has been slower to rebound due to virus concerns and a slower vaccination rollout. The U.S. Services PMI for April (63.1) shows a much more sustained recovery is in place with nearly half of the population receiving their first vaccination and activity overall picking up significantly. Weekly initial jobless claims (547k) came in better than expected (617k) and remained below 600k for the second week in a row. Despite the improvement seen getting folks to work, the claims data remains more than double their pre-pandemic levels.

Rates finish relatively unchanged on the week, despite mid-week rally

A risk pullback combined with investors reassessing the growth forecast beyond the initial jolt of fiscal stimulus checks has the 10-year Treasury yield (1.58%) sitting in the middle of the recent established range. Beyond virus concerns, the next move should depend on the Fed’s ability to jawbone investors into believing they will stay the course in providing continuous support through $120bn open market purchases and keeping rates near zero.

04.25.2021 - Chart 1.1 - yield curve04.25.2021 - Chart 1.2 - WoW yield curve

Spreads widen across the board

Both credit spreads and credit index spreads sold off this week while they still hover around decade tights. On the month, IG is flat while high yield is ~20bps tighter. Expectations for additional new issuance should come on the back of low yields.

04.25.2021 - Chart 2.1 - corporate spread curve04.25.2021 - Chart 2.2 - WoW corporate spread curve04.25.2021 - Chart 3 - credit index spreads

All sectors sell off as the Agg ends 7bps wider. Idiosyncratic winners came on the back of strong earnings for JPM and BOA, which drove their spreads tighter. Losers for the week were the beaten-up cruise line industry, as Carnival and Royal Caribbean see spread widening of +30bps.

04.25.2021 - Chart 4 - spreads by sector for the IG Agg

04.25.2021 - Chart 5 - spreads by ratings

All upgrades, but nothing of substance

CSC Holdings, the cable and telecommunications company, saw a slight upgrade in its debt from B to B+.

04.25.2021 - Chart 6 - S&P rating changes this week

Muni yields relatively flat WoW as demand remains intact

Muni yields changed little over the week despite continued signs of demand outstripping supply. Fund flows continue to be strong and last week alone saw an additional +$2.25bn. New deals continue to be oversubscribed with investors extending into lower-quality credits as the fundamental picture in municipals continues to see improvements with better than expected tax receipts and federal government support.

04.25.2021 - Chart 7 - muni yields by rating and duration

*Disclosure on all charts: Figures shown above are the weighted aggregate of bonds that currently have an IDC price and based off transactions over the past 2 weeks. This may create anomalies in the data but aligns with our effort to reflect actual market conditions. Data pulled as of end of day Thursday, Apr. 22, 2021.

Fixed Income Trivia Time Answer: President Andrew Jackson in January 1835

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