Fixed income market: the week ahead Fixed income market: the week ahead Fixed income market: the week ahead

Fixed income market: the week ahead

Picture of Althea Spinozzi
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  We expect a dovish FOMC meeting on Wednesday, which will most likely fail to slow down the yield curve's steepening as inflationary pressures become evident by the day. In Europe, Italy faces another government crisis as a Senate vote on Wednesday has become key for Conte's government's survival. Meanwhile, Italy's government bond issuance on Tuesday and Thursday might be the catalyst for a broader selloff in the periphery if demand is weak.

The Federal Reserve meeting this week will be in the spotlight after a week in which the reflation trend has become prominent. Inflation expectations rose to a 2-year high with the 10-year Breakeven hitting 2.18% after the strong TIPS auction on Thursday. At the same time, the Senate panel has approved Janet Yellen as Treasury Secretary, leaving the street certain about an increase of U.S. Treasury bond issuance.  Inflationary pressures combined with large government bonds issuance will contribute to a fast bear steepening of the U.S. yield curve inflicting losses to long durations. Suppose Janet Yellen succeeds to issue government bonds with 30+ maturity. In that case, we can expect the steepening of the yield curve to be even faster.

Tapering will most likely be discussed but underplayed by Powell. Although inflationary pressures are getting evident by the day, coronavirus new cases continue to be high, and a more contagious strain from Europe could cause more restrictions to be imposed, limiting inflation’s upside. We believe that tapering will start to be openly discussed only once the vaccine's effects will begin to show in the economy, most likely in the second half of the year. Meanwhile, the U.S. Federal Reserve will continue to expand its balance sheet further- just last week it reached a new record of $7.41 trillion. Powell will acknowledge that economic forecasts improved thanks to the fiscal stimulus. Still, he will highlight that the central bank's policy stance will not change anytime soon regarding interest-rate policy and pace of asset purchases.

The U.S. Treasury will issue 2-, 5- and 7-year notes this week, but these auctions will most likely be uneventful as the Federal Reserve tightly controls the front part of the yield curve.

For bond investors, this effectively translates in continued support for corporate debt, which plays into their favour as the only way to hedge against a rise in interest rates is to seek coupon income. In the short term, a dovish Fed might slow down the increase in yields we have witnessed since the beginning of the year. Yet, we believe that government bonds are explosive as they don't have risk mitigation potential right now as they still offer the lowest yield in history. As explained in last week's analysis, a 50bps move in 10-year Treasuries corresponds to a loss of about 4.7%, while in 30-year Treasuries it can inflict as much as 12% loss.

In the old continent, Germany Ifo survey will probably show that Europe is heading towards a double-dip recession. This data can negatively affect European sovereigns as the market is still digesting the ECB’s passiveness in light of the government crisis in Italy, Netherlands, and Estonia.

Nevertheless, the periphery’s real test will arrive on Wednesday when the Italian Senate will be presented with a motion by the Minister of Justice. Italian newspapers say that there is the possibility that Prime Minister Conte might resign if the motion is not passed causing another government crisis.

It is, therefore, crucial to monitor demand for the country’s government bonds. Italy is to sell notes on Tuesday and Thursday with maturity up to 10-year. Last week, demand for Spanish bonds was weak with the bid-to-cover ratio for 7-year notes falling more than 70% compared to previous auctions. Ten-year BTPS closed the week at 0.74%, 13 basis points wider on the week reaching the highest yield since November. If sentiment continues to deteriorate, 10-year BTPs might find new resistance at 0.8%.

We believe that any short-term weakness in BTPs represents a buying opportunity. Indeed, on one side, we believe that early elections are the least likely outcome. On the other, the ECB will need to continue to inject more money in the system until a recovery path is clear and more fiscal stimulus is added, which won’t be the case this year as German elections are underway. As the ECB prepares to use its full firepower, European sovereigns that trade richer against their peers, such as Italy, will continue to tighten.

Economic Calendar

Monday, the 25th of January

  • Germany: IFO Business climate
  • Eurozone: French President Emmanuel Macron and German Chancellor Angela Merkel speak at the World Economic Forum’s The Davos Agenda 2021 
  • United States: 2-year Note Auction

Tuesday, the 26th of January

  • Japan: BOJ Monetary Policy Meeting Minutes
  • United Kingdom: Claimant Count Change, ILO Unemployment Rate, Average Earnings
  • Italy: to sell 2026 Linkers and 2022 Zero bonds.
  • United states: Redbook Index, Housing Price Index, 5-year Note Auction

Wednesday, the 27th of January

  • Australia: Consumer Price Index
  • Japan: Leading Economic Index
  • Germany: Gfk Consumer Confidence Survey
  • Switzerland: ZXEW Survey
  • United States: Durable Goods Orders, Nondefense Capital Goods Orders ex Aircraft, Federal Reserve Interest Rate Decision, FOMC Press Conference

Thursday, the 28th of January

  • Japan: Retail Trade
  • Eurozone: Consumer Confidence, Business Climate
  • Germany: Harmonized Index of Consumer Prices
  • United States: Gross Domestic Product Price Index, Goods Trade Balance, Continuing Jobless Claims, 7-year Bond Auction
  • Italy: to sell 5- and 10-year bonds

Friday, the 29th of January

  • Japan: Tokyo Consumer Price Index, Industrial Production
  • France: Gross Domestic Product
  • Switzerland: KOF Leading Indicator
  • Germany: Unemployment rate, Gross Domestic Product
  • Spain: Gross Domestic Product
  • Belgium: Gross Domestic Product
  • United States: Personal Income and expenditures, Michigan Consumer Sentiment Index
  • Canada: Gross Domestic Product


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.