Three bond market trends this week


Craig Inches, Head of Short Rates and Cash

9 March 2017

Across our Fixed Income Team, we see three trends shaping bond markets this week:
 
1. Gilt markets appeared unfazed by the announcements from the chancellor yesterday afternoon, Gilt issuance for the next fiscal year arrived a little higher than forecast at £115.1bn, to be delivered via 40 auctions including five syndications. The biggest moves were in long dated index linked gilts, which outperformed conventionals on the assumption that the next index linked syndication will not be until July.

2. In European markets, the Bund and the OAT continue their merry dance, with the 10 year recently compressed to just 58bps. Should this widen considerably, it could create some opportunities in French government bonds, politics permitting. Meanwhile in European credit, long dated bonds look a little more attractive this week thanks to a widening in spreads at the front end of the curve.

3. In credit markets, we’ve been taking an interest in bonds issued by a number of smaller companies in the social housing sector, which normally trade wider than their larger counterparts. We expect to see some consolidation  in this sector, which could lead these smaller bonds to outperform. Meanwhile, we continue to favour  the social sector in general thanks to the  security provided by their underlying assets in these bonds.
 
The gilt market’s reaction to the budget was to treat it as a non-event, with the majority of Wednesday’s rise in yields being  driven from across the pond as  the ADP Jobs Report showed a US economy in rude health. With net borrowing roughly as expected, the chancellor and the Office for Budget Responsibility (OBR) have merely tinkered with the details without upsetting expectations.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.