Projected 2020 Fiscal Deficit % of Global GDP · Crowded EM, Deficit DM0.0 With various fiscal easing packages around the world being offered up to meet the needs of battered populations

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Crowded EM, Deficit DM With various fiscal easing packages around the

world being offered up to meet the needs of

battered populations and stressed supply

chains, global fiscal deficits will soar in 2020.

Across a sample of 23 developed and emerging

markets accounting for 85% of global output,

the US stands out at a forecasted fiscal balance

of –12.6% of GDP, with South Africa (-11.3%),

Brazil (-10.9%), and the UK (-9.3%) also notable.

Norway is actually going to run a 3% surplus

despite weak oil revenues, while the Czech Re-

public (-1.0%) and Switzerland (-1.7%) also run-

ning small deficits. The result is a –6.7% deficit

for 2020; that’s pretty representative of global

fiscal deficits. To summarize, at left we show

the contribution to the total fiscal deficit by

country; the US, China, and Eurozone are all

raising global deficits by 1% or more, with the

US close to 3%.

The question is: how much is all that deficit

spending crowding out fixed income markets?

We use the policy rate—ten year term struc-

ture as a proxy, under the theory that steeper

curves indicate higher risk premiums related to

inflation (generated by excessive stimulus and/

or malinvestment) and/or expectations of high-

er policy rates to tamp down said inflation. The

results are fascinating. In developed markets,

there’s very little relationship (r-squared =

0.100) between the term structure and the size

of 2020’s fiscal deficit relative to GDP. In other

words, little evidence that markets are worried

deficits are going to fuel bad outcomes. For

emerging markets, it’s the complete opposite:

higher deficits mean steeper curves.

This dichotomy perfectly summarizes the differ-

ence between developed and emerging mar-

kets rates; only the former sees modest costs

to expanded deficits.

Developed Markets Show Little Crowding Out

Emerging Markets Are The Opposite

Projected 2020 Fiscal Deficit % of Global GDP

Note: accounts for 85% of

2020 GDP. All GDP

numbers are OECD 2020

estimates. Total = 6.7% of

World GDP

y = -0.0262x + 0.0764R² = 0.0995

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

-15 -10 -5 0 5

10y

-P

oli

cy R

ate

Cu

rve

(%)

Projected 2020 Fiscal Deficit

y = -0.466x - 0.7721R² = 0.7258

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-12 -10 -8 -6 -4 -2 0

10y

-P

oli

cy R

ate

Cu

rve

(%)

Projected 2020 Fiscal Deficit

-2.91-1.06

-0.96-0.38-0.33-0.26

-0.14-0.12-0.11-0.09-0.07-0.07-0.05-0.05-0.04-0.03-0.03-0.02-0.02-0.01-0.010.00

0.01

-3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5

USChina

EZJapan

UKBrazilIndia

TurkeyCanada

AustraliaMexicoRussia

South AfricaKorea

PolandIndonesia

SwedenChile

SwitzerlandNew Zealand

DenmarkCzech Rep.

Norway

Page 2 of 7 The Bespoke Fixed Income Weekly 5/6/20 BespokePremium.com


Treasury Yields, Prices, and 30 Year Fixed Mortgage Rate

National Average 30 Year Mortgage Rate (%)

30 Year Treasury Future (Price, Roll Adjusted) 30 Year Treasury Bond (Yield, %)

2 Year Treasury Future (Price, Roll Adjusted) 2 Year Treasury Note (Yield, %)



107.0

107.5

108.0

108.5

109.0

109.5

110.0

110.5

111.0

3.5

3.7

3.9

4.1

4.3

4.5

200 DMA

0.00

0.40

0.80

1.20

1.60

2.00

2.40 200 DMA50 DMA

116

118

120

122

124

126

200 DMA

50 DMA

0.20

0.60

1.00

1.40

1.80

2.20

2.60

200 DMA

50 DMA

123

125

127

129

131

133

135

137

139

141

200 DMA

50 DMA

0.20

0.70

1.20

1.70

2.20

2.70

200 DMA

50 DMA

160

170

180

190

200

210

220

230

240

250

200 DMA50 DMA

0.50

1.00

1.50

2.00

2.50

3.00 200 DMA

50 DMA

50 DMA



Money Markets, ETFs and Trade of the Week

Today TLT is set to open below its 50-DMA

thanks to yield curve steepening in the wake of

the Treasury’s quarterly refunding announce-

ment. Only one other close below the 50-DMA

has come in the past four months. Conspicuous-

ly, that close was the low for equity markets,

which bounced thanks to widespread policy sup-

port across fiscal and monetary action. The de-

cline today back below trend is therefore nota-

ble to us as a key shift in sentiment and change

in the qualitative backdrop of markets.

Compression in “risk free” rates premium over

the last few months has been one among a

range of tailwinds for high-duration assets like

corporate bonds and equities. If that tailwind

can change to a headwind without an improve-

ment in economic activity that also provides sub-

stantial support for the equity market outlook,

it’ll be the first time since 2018 that rates will be

rising into the teeth of a deteriorating economy.

Even with losses today, duration has still ruled

the roost for YTD returns.

Yield 5 Day YTD

Ticker Name Price (%) TR (%) TR (%)

AGG Core US Bond Mkt 116.88 2.43 -0.21 4.89

BIL 1-3 MoT Bill 91.53 0.19 0.00 0.41

BIV Vang. Intrmed. 91.11 2.34 -0.11 5.36

BKLN Senior Loans 20.76 4.52 -1.05 -7.60

BLV Vang. Long Term 108.84 2.87 -1.61 9.91

BND Tot Bond Mkt 87.31 2.39 -0.11 4.99

BOND PIMCO Tot Ret 109.43 2.85 0.08 2.55

BSV Barc. Short Term 82.55 1.98 -0.02 3.12

IGSB 1-3 Yr Corp. 53.54 2.69 0.06 0.79

EDV Long Dur. Trsy 169.32 1.98 -2.00 30.91

EMB JPM EM Bonds 100.78 4.51 0.84 -10.67

FLOT Floating Rate 49.93 2.24 0.17 -1.24

HYG iBoxx HY 79.25 5.59 -0.81 -8.21

IEF 7-10 Yr Bonds 121.64 1.26 -0.16 10.89

IEI 3-7 Yr Trsy 133.22 1.13 -0.03 6.48

JNK Barc. High Yield 97.57 6.36 -0.72 -9.20

LQD iBoxx Invest. Grade 128.37 2.99 -1.05 1.36

MBB MBS 110.89 2.36 0.19 3.50

PFF Preferreds 33.99 5.99 -1.41 -7.81

PGF Financial Preferreds 17.92 5.44 -0.55 -3.20

PGX Preferred Port. 14.02 5.30 -0.99 -4.87

SPSB Barc. Short Term 30.92 2.26 0.25 1.07

SHM Short Term Munis 48.99 1.34 0.38 0.19

SHV Short Term Trsy 110.82 0.99 0.02 0.81

SHY 1-3 Yr Trsy 86.59 1.00 0.01 2.84

SNLN iBoxx Sen Loan 15.57 3.08 -0.50 -9.95

STPZ PIMCO 1-5 Yr TIPS 52.31 3.21 -0.11 0.48

TIP TIPS 121.27 2.95 -0.53 4.55

TLH 10-20 Yr Trsy 168.20 1.39 -0.59 17.77

TLT 20+ Yr Trsy 166.09 1.56 -1.43 23.31

VCLT Long Term Corp 101.26 3.58 -1.59 1.15

VCSH Vang. Short Term 80.93 2.51 0.17 0.77

TBF Short 20+ Yr Trsy 15.38 0.91 1.32 -21.40

TBX Short 7-10 Yr Trsy 23.96 0.38 0.20 -9.79

Key Fixed Income ETFs

Fid. Cash 0.01 0.000 Fed Funds 0.050 0.010

Van. Prime 0.57 -0.080 O/N Libor 0.057 0.001

Blackrock Cash 1.52 1.519 1M Libor 0.263 -0.175

Fid. Munis 0.15 0.020 3M Libor 0.501 -0.340

Schwab Govt 0.03 -0.071 4 Wk T Bill 0.081 0.023

Fidelity Prime 0.46 -0.030 3M T Bill 0.114 0.036

JPM Prime 0.32 -0.045 6M T Bill 0.140 0.044

State St Gov't 0.20 -0.020 1Y T Bill 0.157 0.018

GS MMkt 0.52 -0.104 Repo 0.090 0.105

Money Market Rates

Money Market Funds Key Short Term Rates

Projected 2020 Fiscal Deficit % of Global GDP

130

135

140

145

150

155

160

165

170

175

180



Treasury Yield Curve: Current vs 3 Months Prior, w/ BPs Change

Bunds Yield Curve: Current vs 3 Months Prior, w/ BPs Change

Eurodollar Yield Curve: Current vs 3 Months Prior, w/ BPs Change

Inflation Curve: Current vs 3 Months Prior, w/ BPs Change

Bespoke Global Yield Curve: Current vs 3 Months Prior, w/ BPs Change

-132.49

-125.55-116.52

-106.42-99.05

-95.1

-73.89

0

50

100

150

200

250

1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year

5/6/2020

2/12/2020

+2.8

-15.6 -16.7-17.8

-18.4

-28.3

-20

-100

-80

-60

-40

-20

0

20


5/5/2020

2/12/2020

-131.5 -127.5 -117-110.5 -107.5 -103.5 -105 -101.5

-100.5 -97.5

-98

0

20

40

60

80

100

120

140

160

180

3 Mo 6 Mo 9 Mo 12 Mo 15 Mo 18 Mo 21 Mo 24 Mo 27 Mo 30 Mo 33 Mo

5/6/2020

2/12/2020

-217.4

-144.65

-120.81

-92.36-75.2 -56.55

-27

-120

-70

-20

30

80

130

180


5/6/2020

2/12/2020

-78.46-70.17

-61.16

-47.33

-37.04

-25.54

-8.48

110

130

150

170

190

210

230

250

270

290

310


5/6/2020

2/12/2020

Benchmark Yield Curves Treasury refunding today is concentrated out the

curve as issuance begins on 20 year notes and

issuance is rolled further out. Treasury has an

enormous amount of cash on hand in the Treas-

ury General Account (just shy of $1trn in the most

recent data, a record) obviating the need for more

bills as CARES Act funds get doled out.

Two year yields have technically made marginal

new lows over the last couple of days, and out-

year Eurodollars have been making new highs in

price (lows in yield), but the move has been very

small overall. In short, rates volatility has col-

lapsed thanks to the return to the effective lower

bound.

The combination of a failed mutual Eurozone debt

instrument to meet COVID challenges and the rul-

ing by Germany’s highest court this week that the

ECB’s government bond QE may violate German

law haven’t dealt a death blow to spreads. Italy’s

250 bps spread is well below the peaks from when

Lega controlled the government in 2018.

When compared to their relationship over the

past year, oil prices and 10-year breakevens are

trading right in-line with where they ought to be.

The collapse in TIPS prices that drove plunging

breakevens in March thanks to weak liquidity dur-

ing that period and negative oil prices at the front

of the curve are in the rearview mirror.

Interest rates tracked by our Bespoke Global Yield

Curve continue to make new lows across the

front term structure. Longer-term yields are

much more stable, leading to the steepest read-

ings for the 2s10s and 5s30s term structure in 5

years. In the case of 5s30s, that steepening has

taken the slope of the curve to near its highest

levels in the history of our data.



Bespoke Global Yield Curve: 2 Year Bespoke Global Yield Curve: 5 Year

Bespoke Global Yield Curve: 10 Year Bespoke Global Yield Curve: 30 Year

Bespoke Global Yield Curve: 2s10s Bespoke Global Yield Curve: 5s30s

130

150

170

190

210

230

250

270

290

310

330

170

190

210

230

250

270

290

310

330

350

370

210

235

260

285

310

335

360

385

410

270

310

350

390

430

470

30

40

50

60

70

80

90

100

110

120

130

55

65

75

85

95

105

115

125

135



Curves, Spreads and Total Returns

2 Year vs 5 Year 10 Year German Bund Long Dated Treasuries

Treasury Curves (BPs) Spreads vs Treasury (BPs) Total Return Over Past Year (BPs)

High Yield Corporates

Municipal Bonds

Mortgage Backed Securities

Emerging Markets2 Year vs 10 Year

5 Year vs 10 Year

5 Year vs 30 Year

10 Year vs 30 Year

10 Year Italian BTP (vs German Bund, not Treasury)

Municipal Bonds

10 Year Swap

High Yield Corporates

-15

-10

-5

0

5

10

15

20

25

30

-10

0

10

20

30

40

50

60

70

80

4

8

12

16

20

24

28

32

36

40

44

48

45

55

65

75

85

95

105

115

35

40

45

50

55

60

65

70

-270

-250

-230

-210

-190

-170

-150

-130

-110

-90

120

160

200

240

280

320

-16

-8

0

8

16

24

32

40

48

56

64

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

330

430

530

630

730

830

930

1030

1130

-1800

-1500

-1200

-900

-600

-300

0

300

600

900

-600

-400

-200

0

200

400

600

800

1000

-500

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0

100

200

300

400

500

600

700

800

-800

-600

-400

-200

0

200

400

600

800

1000

1200



Page 2: These charts track the performance of the yield of Treasury bonds and their price in the futures

market over the past year. Also presented is the National Average 30 Year Fixed Rate Mortgage ac-

cording to bankrate.com’s index of mortgage lending.

Page 3: At upper left is a table summarizing the level and change of short term interest rates. Money

market fund rates represent the highest yields available to large money market fund investors for a

spectrum of funds. Next to the money market fund rates are benchmark short-term interest rates.

Each change represents the change in yield over the last five days. At lower left we show a grid of ma-

jor fixed income ETFs and include yield, five day change, and year to date total return for each ETF.

Our Trade of the Week is intended as a starting point for further research.

Page 5: Benchmark yield curves are “risk free” interest rates that other fixed income securities trade

relative to. All yield curves are expressed in basis points. Three month changes in the curves are

shown in basis points at each point on the curve. The Bespoke Global Yield Curve is a Purchasing Pow-

er Parity Gross Domestic Product-weighted average of nominal yields for the world’s fifteen largest

economies. It is graphed versus the yield curves for the United States and Germany, the two most-

followed global benchmarks.

Page 5: Time series charts for the yields of the Bespoke Global Yield curve, presented in basis points.

Page 6: The Treasury curve charts in column one show the difference in yield between the second se-

curity listed and the first. For instance, if 2 Year Treasuries currently yield 0.45% and 5 Year Treasuries

yield 1.45%, the “curve” between 2 Years and 5 Years is 1.00%. Typically, a flattening yield curve (a

chart of the curve moving downwards, or the difference between the two yields narrowing) is an indi-

cation of economic headwinds, but the absolute level of the curve between Treasuries can be as im-

portant as the change in that curve.

The spreads column shows yield differences between Treasuries and other important sectors of the

fixed income market. Each spread is expressed as the yield on the bond in question. For instance, if

Italian 10 Year government bonds or “BTPs” yield 3.50% and 10 Year Treasuries yield 3.00%, the spread

between them is 0.50%. This spread can be negative. All else being equal, a positive spread to Treas-

uries indicates increased credit risk. But when spreads are measured between two different currencies

(for instance, between German Bunds and Treasuries), a negative spread to Treasuries can be caused

by different inflation expectations, real growth rates or other differences between the currencies in

question.

Finally, the total return indices in the right hand column show the total return for Bank of America

Merrill Lynch bond market indices in each sector listed. Total return shows both coupon income and

price appreciation for each basket of bonds. These total returns are graphed as total return over the

prior year, starting from zero as of one year ago today.

The Fixed Income Report Explained

Documents

Projected 2020 Fiscal Deficit % of Global GDP · Crowded EM, Deficit DM0.0 With various fiscal easing packages around the world being offered up to meet the needs of battered populations