Global equities continued to race higher as the earnings season came to an end. The bond market also remains a buzz of activity as investors continue to shrug off record low interest rates on the Federal Reserve moving to bolster liquidity levels.
Equities and Bonds Outlook
Chinese stocks started the week on a roll rallying as investors weighed in on confirmation of China’s new fiscal stimulus. U.S equities also continued from where they left last week, rallying to record highs as investors shrugged off concerns of economic slowdown owing to the potential impact of the second wave of coronavirus infection.
U.S Treasury yields also continued to hold steady, be it showing signs of bottoming out from record lows a plethora of positive economic data has continued to fuel demand for bonds even as the 10-year Treasury note continues to languish at lows of 0.68% and the 30 year Treasury bond at 1.41%.
However, the yield moved lower on Tuesday, shrugging off strong housing data in the U.S. Sentiments in the sector remain subdued as investors await the outcome of a new round of aid highly needed to bolster the coronavirus hit the economy.
Democrats and Republicans are entangled in a fierce stand-off with neither willing to budge on the way forward over the next stimulus plan highly needed to offset the effects of a second wave of COVID-19 pandemic.
A stalemate in Washington could make it difficult for yields to move higher according to fixed-income strategists at Schwab Center, Collin Martin. For instance, the yield failed to budge despite housing data for July coming in better than expected.
Fitch Rating on Bonds
The Fitch Rating has already taken various conforming rating actions on U.S enhanced bonds and tender options bonds, given the stalemate in Washington and the record low interest rate environment.
According to the firm, long term ratings in enhanced municipal bonds may be much higher than those of their enhancement providers. Similarly, the short term ratings on enhanced municipal bonds may be much lower than those of their liquidity providers.
Amid the stalemate over stimulus aid in the U.S, investment in high-grade bond sales reached a record high of $1.35 billion early in the week, surpassing 2017’s full-year total ins. The endless investor appetite for bonds amid the record low interest rates stems from the Federal Reserve’s commitment to bolster liquidity in the market.
The FED has already pledged to use its near-limitless balance sheet to purchase corporate bonds, something that continues to fuel investor appetite. The FED commitment has seen a spike in bond offerings in almost all sectors of the economy, even from battered sectors such as the cruise line, plane makers, and hotels.
The massive new debt supply in the market might as well explain the sharp increase in longer-term bonds last week. The 30-year yield raised 21 basis points as the curve continued to steepen. The FED moving to bolster liquidity level has also had a hand in fuelling buying spree in the equity markets. The S&P 500 is already flirting with its record highs, registered early in the year, while the NASDAQ index has gone on to register a new all-time high.