US government bond yields were boosted during September by hopes that fresh fiscal stimulus might be introduced. However, by the end of the month, a deal had not been agreed between Republicans and Democrats.
- Speculative-grade bonds remain vulnerable
- Global corporate defaults have been high YTD
- UK retail investors continued to favour global bond funds
To view the series of market updates through September, click here
US bond yields were boosted during September by hopes that fresh fiscal stimulus might be introduced. However, by the end of the month, a deal had not been agreed between Republicans and Democrats. Over September as a whole, the yield on the ten-year US Treasury bond eased from 0.72% to 0.69, and the 30-year Treasury bond yield fell from 1.49% to 1.46%. Looking ahead, investor sentiment is likely to remain hostage to political developments in the US ahead of the Presidential Election on 3 November.
“Investor sentiment is likely to remain hostage to political developments in the US”
Ratings downgrades have slowed but “negative” outlooks have reached unprecedented highs during the third quarter, according to S&P Global Ratings. Since the start of the Covid-19 pandemic, issues rated “B” and below have represented more than 50% of downgrades, and 90% of defaults have been from companies rated “CCC”. S&P expects defaults amongst speculative-grade issues to increase by June 2021 from 6.2% to 12.5% in the US, and from 3.8% to 8.5% in Europe. Moreover, although some sectors – including technology, consumer staples, and housebuilders – have remained largely unaffected by the pandemic, other industries – notably airlines, hotels, and automotive – are likely to continue to feel the pain well into 2023. Meanwhile, banks are expected to be able to absorb the shock from the coronavirus crisis, but recovery is set to be slow and uneven.
Elsewhere, credit ratings agency Fitch reported high rates of global corporate defaults: over the first eight months of the year, global corporate defaults rose to 42 and were particularly concentrated amongst transportation, retailing, and commodity-related sectors. Looking ahead, Fitch also expects to see relatively high levels of corporate defaults amongst speculative-grade issuers. Although the immediate economic recovery from the impact of lockdown has been relatively swift, the pace of the broader global recovery is set to slow: the US and eurozone economies are not predicted to return to pre-Covid levels until the fourth quarters of 2021 and 2022 respectively.
Bonds remained the most popular asset class for UK retail investors during August, amassing £.18 billion in net inflows. According to the Investment Association (IA), Global Bonds was the most popular IA bond sector, and the second most popular sector overall. £ Strategic Bond was the fourth most popular sector, and every IA bond sector experienced positive net retail inflows during August apart from £ High Yield.
A version of this and other market briefings are available to use in our newsletter builder feature. Click here
