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WEEKLY FIXED INCOME UPDATE

For the week of November 11, 2019

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CHART OF THE WEEK: EXPECTATIONS FOR FINANCIAL CONDITIONS REACHES RECENT HIGH IN THE U.S.


Although the Bloomberg Consumer Comfort Index fell noticeably recently, it remains at a very high level. The drop in confidence was not driven by employment prospects as jobless claims fell last week showing sustained strength in the labor market. Furthermore, the University of Michigan’s Financial Conditions Index, a measure of expected change in U.S. households’ financial situations a year from now, reached an expansion high recently (see Chart of the Week).

WEEK IN REVIEW

As investors reassess economic conditions and U.S. Federal Reserve (Fed) policy, the yield curve is steepening abruptly and rate volatility is declining back down from its recent peak in mid-August. The market is in the process of pricing out further Fed easing; it now sees only an 80% chance of one more rate cut in the next twelve months. Fed “forward guidance” that it won’t begin raising rates until inflation reaches and exceeds 2% is translating into a view that the Fed will be on hold. Short-term inflation expectations have risen recently along with oil prices but long-term expectations are basically unchanged at a very low level.

Treasury yields jumped higher and credit spreads tightened on the week as a pro-cyclical rally unfolds, driven by better than expected corporate earnings and some improvement in trade sentiment. Investment grade bond spreads were tighter overall by 5 basis points, and high yield kept pace, better by 15 basis points. But, with the S&P 500 hitting a fresh high this past week, the defensive nature of the rally in credit remains in place – an index of high yield spreads is still approximately 20 basis points wide of the low reached in April of this year.

Meanwhile, the S&P/LSTA U.S. Leveraged Loan Price Index similarly sits approximately $1.50 below its year-to-date high in April. However, with softening expectations for easing by the Fed for 2020 post their late October statement, loan market participants are looking for signs of stabilization in the retail mutual fund outflows that have largely been driven by the fall in front-end benchmark rates.

In the U.S., for purchase mortgage production has slowed sharply in recent weeks, calling the sustainability of the recent rally in new and existing home sales into question. While it’s possible that the weakness in activity reflects supply side constraints – the quantity of homes for sale is much lower than usual – it’s also possible that lenders continue to impose standards that are extremely stringent, preventing latent housing demand from becoming effective.

THE WEEK AHEAD

Wednesday
Consumer Price Index, Jerome Powell Speaks
Thursday
Jobless Claims, Producer Price Index
Friday
Retail Sales, Industrial Production





   

Index Returns

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1 Week YTD 1-YR 3-YR 5-YR
U.S. Aggregate -0.87 7.74 10.6 2.98 3.01
IG Corporates -1.04 11.89 13.44 4.47 4.18
HY Corporates 0.03 11.94 7.77 6.22 5.24
Bank Loans 0.13 6.02 2.66 4.36 3.95
IG Corporates 1-3 Year -0.12 4.79 5.7 2.68 2.29
Global Aggregate -1.36 5.53 7.9 2.19 1.99





   
   
      
      

TREASURY RATES

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
2 Year 1.67 1.39 2.97 12 -81 -129
5 Year 1.75 1.33 3.09 20 -77 -135
10 Year 1.94 1.46 3.24 23 -74 -130
30 Year 2.42 1.93 3.43 23 -59 -101





   
   
      
      

CREDIT SPREADS

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
IG Corporates 105 105 157 -5 -48 -9
HY Corporates 369 346 537 -16 -157 22
EM Aggregate 311 278 350 -12 -32 23
CMBS 69 60 87 -2 -17 0
MBS 42 32 57 -5 7 7
ABS 42 30 53 -1 -11 1





   
      
      

OTHER INDICATORS

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Latest 1-WK Change YTD Change 1-YR Change
S&P GSCI 419.11 2.23 44.79 -24.23
Crude Oil - WTI ($) 57.24 1.04 11.83 -3.43
Trade Weighted Dollar* 129.08 -0.35 0.97 1.52
5-Yr Breakeven Inflation Rate (%) 1.64 0.13 0.14 -0.29

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