Fixed income market: the week ahead

European sovereigns remain at the mercy of US Treasuries until fall

The message of last week’s European Central Bank meeting was clear: status quo until the German elections. It means that European government bonds will remain vulnerable to changes in US Treasury yields from now until fall. It is something that the ECB shouldn't be pleased with since US yields will most likely resume their rise, pushing the cost of funding higher in Europe too.

We believe that increased purchases under the PEPP framework have proved useless. Indeed, the correlation between EU sovereigns and the US safe-havens remains intact. The ECB needs to substantially increase purchases under this program if it wants to keep yields stable in the euro area. In our opinion, the reluctance of the ECB to increase firepower under this program shows a vital concern regarding uncertainties surrounding the German election. Additionally, collateral scarcity remains an issue for the ECB has been buying more bunds than issued starting from the Covid-19 Pandemic.

Bond investors should prepare for higher yields in Europe. A correction will be most felt in those countries where bond yields continue to be close to zero or negative, such as Germany and France. Ten-year Bund yields remain capped by their resistance at -0.2%. However, if this is broken, they might rise fast to try residence at -0.15%, leading them to a fast track to 0%.

This week Italy is issuing 10-year BTPs; we do not expect volatility surrounding this auction. Yet, it will be essential to see if any weakness in bidding metrics is observed.

BOJ interest rate decision

We expect the BOJ to keep monetary policies unchanged a month after the central bank reiterated its commitment to continue monetary easing via YCC for a long time. Yet, there are concerns regarding the recent surge in coronavirus, which may further weaken the service sector during this week's Gold Week holiday. Hence, the updated economic outlook will be crucial to understand whether financial estimates are still valid at the beginning of the year.

JGBs, together with Chinese government bonds, have helped bond investors to preserve value since the beginning of the year. Indeed, while US Treasuries fell 3.3% and European sovereigns plunged 2.8% year to date, Chinese government bonds rose by 1.5%. At the same time, JGB were able to provide a return slightly above zero. Suppose the macroeconomic condition deteriorates, and the BOJ is forced to continue to be aggressive. In that case, JGBs may continue to provide a much-needed shelter as bonds fall worldwide.

Economic Calendar:

Monday, April the 26^th

• Japan: Leading Economic Index
• Germany: IFO Business Climate, IFO Current Assessment, IFO Expectations
• United States: Durable Goods Orders, Nondefense Capital Goods Orders ex Aircraft, 5-year Notes Auction

Tuesday, April the 27^th

• Japan: BoJ Monetary Policy Statement and Interest Rate Decision, BoJ Outlook Report
• United States: Housing Price Index, S&P/ Case Shiller Home Price Indices, Consumer Confidence, 7-year Note Auction

Wednesday, April the 28^th

• Japan: Retail Trade
• Australia: RBA Trimmed Mean CPI, Consumer Price Index
• Germany: GFK Consumer Confidence Survey
• Switzerland: ZEW Survey – Expectations
• Canada: Retail Sales
• United States: Fed Interest Rate Decision, Fed’s Monetary Policy Statement and Press Conference

Thursday, April the 29^th

• New Zealand: Trade Balance
• United Kingdom: Nationwide Housing Prices
• Spain: HICP, Consumer Price Index, Unemployment Survey
• Germany: Unemployment Rate and Change, Harmonized Index of Consumer Prices, Consumer Price Index
• Eurozone: Private Loans, M3 Money Supply, Economic Bulletin, Consumer Confidence, Business Climate, Industrial Confidence
• Italy: 10-year Bond Auction
• United States: Core Personal Consumption Expenditures Prices, Initial Jobless Claims, Gross Domestic Product Annualized, Pending Home Sales

Friday, April the 30^th

• New Zealand: ANZ – Roy Morgan Consumer Confidence
• Japan: Tokyo ex Fresh Foods, and Energy Unemployment Rate, Industrial Production
• China: Non-Manufacturing PMI, NBS Manufacturing PMI
• France: Gross Domestic Product, Consumer Price Index, Consumer Spending, Producer Prices
• Germany: Import Price Index: Gross Domestic Product
• Switzerland: Real Retail Sales, KOF Indicator
• Italy: Unemployment, Consumer Price Index
• Spain: Gross Domestic Product (Estimated), Retail Sales, Current Account Balance
• Eurozone: Gross Domestic Product, Consumer Price Index, Unemployment Rate
• United States: Core Personal Consumption Expenditures – Price Index, Personal Spending,Chicago Purchasing Managers’ Index, Michigan Consumer Sentiment Index
• Canada: Gross Domestic Product