Market Commentary

The Fixed Income Brief: Bond Market Sends Yields to Lows Amid Skepticism on Growth Outlook

Investors are becoming more skeptical on the growth outlook as infections rise across the United States, sending bond market yields through recent lows. Fixed income portfolio managers are getting comfortable with rates remaining lower for longer.

US Treasury rates fall to pre-reopening levels as the continued spread of COVID-19 plagues the large parts of the economy that began to ease lockdown measures first. Fixed income managers remain wary of the growth outlook; they are getting comfortable with rates remaining lower for longer as the 30-year bond yield fell through 1.30% and is now at its narrowest spread to the 10-yr in 2 months. The US 5yr bond also hit a record low of 0.258% as the front end of the yield curve remains well anchored. Despite lower Treasury yields, credit spreads followed equities to a better week overall, a product of the continued extraordinary support of the Fed.

The yield curve continues to flatten

The front end of the yield curve continues to flatten, but we saw the most flattening this month on the long end, as the US 30 year is -9bps lower on the month and the 10 year is –4bps lower on the month. US Treasuries remain extremely liquid, as dealers see strong bids on inventories.

07.12.2020 Chart 1 Wow yield curve and spread changes

Healthcare and consumer discretionary drove credit spreads tighter

Credit spreads ended tighter on the week driven by healthcare and consumer discretionary sectors. Financials were a drag on the index, as it continued its bearish trend and widened roughly +30 bps. Despite financial, single A credit tightened -8 bps, outperforming both AA and BBB.

07.12.2020 Chart 2 - Spreads by Sector07.12.2020 Chart 3 - Spreads by rating

New issuance led by Takeda Pharmaceutical

It was a relatively quiet week in new issuance given the lull from the post-holiday week. Issuance continues to target the longer maturities, as duration of investment-grade corporate credit universe is at 8.5 years, up from ~7.0 years last year. The big issuer was Takeda Pharmaceutical who tapped the long end of the curve, issuing 2.5BN in 10 year, 1.5BN in 20 year, 2BN in 30 year, and 1BN in 40 year.

07.12.2020 Chart 4 - Top IG new corporate issuances by duration

High yield trading mirrors equity trading

High yield traded tighter on the week, which mirrors the overall environment with equities trading higher and yields moving lower. The high yield market continues to trade hand-in-hand with equities, with a ~0.8 correlation. Vale (1.5BN 10 year) and Enbridge (1BN) who are both rated high yield by Moody's tapped the new issue market and ended tighter from their new issue.

07.12.2020 Chart 5 YTW by sub-sector

Muni technicals remain supportive

Municipals continue to keep up with Treasuries as investors compete for bonds, closing -4 bps lower in yield week over week.

07.12.2020 Chart 6 Muni yields by rating and duration

Two large deals in muni new issues

Largest two deals of the week were the Commonwealth of Massachusetts (AA/Aa1) and Port Authority of NY /NJ (A+/Aa3) issuing over $1 billion each. The MA deal is spread across the curve but heavily weighted to the long end and PA NY/NJ issued a 3 year at 1.086%.

07.12.2020 Chart 7 Muni new issue summary by rating and duration

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