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Setting the investment agenda

28.09.2020

Monthly Agenda September 2020 - Fixed Income

Equities have bounced around quite a bit over the past few months. Bond investors have been significantly calmer. Perhaps it’s because most of the bonds are already priced for rates to be at zero for a long, long time. This naturally leads to a debate about whether compressed fixed-income volatility will manifest itself in other markets. For example, macro imbalances may materialise in currency markets.

Chart 11: What’s the fuss – bond market volatility low

Enlarge Source: Bloomberg

 

Rate-cut fever has broken out in Australia. Australian government bonds are set for their best month since January after Bill Evans, the doyen of RBA forecasting, joined the chorus calling for fresh easing on Oct. 6 to coincide with the Federal Budget. Bank bill rates, 3y and 5y bond yields all dropped to records, setting holders up for disappointment if Governor Lowe sticks with his more-usual stance of calm optimism.

Chart 12: Australian 3-year bond yield 

Enlarge Source: Bloomberg

 

Overzealous dollar bears are quickly flipping to bulls as the prospect of shutdowns linked to a Covid resurgence and a pause in monetary stimulus undermines reflation bets. 

The US dollar appears to be catching up to the recent drop in U.S. inflation expectations. It may not be a coincidence that dollar strength coincides with rising Trump approval ratings.

Chart 13: US dollar strengthens on renewed shutdown fears

Enlarge Source: Bloomberg

 

 

 

Tracey McNaughton
Chief Investment Officer

 

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