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

Fixed income market: the week ahead

Bonds
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  The bond market is providing contradictory signals. While nominal rates are biting the "lower for longer" Federal Reserve's message, breakeven rates have fallen amid tapering fears arising from the latest FOMC minutes. This week's ISM Services PMI numbers and nonfarm payrolls provide an opportunity for breakeven rates to resume their rise, reviving the reflation trade. In Europe, the consumer price index will be in focus, and we don't expect it to lead to discussions about tapering among ECB policymakers. Last week's weak 15-year Bund auction shows that European countries need the central bank's support to carry their financing operations. This week's 30- and 50-years OAT auction will be vital to understanding whether appetite for duration continues to deteriorate, causing yields to rise even further ahead of the German election.


The bond market buys “lower for longer” Fed’s message, but breakevens don’t

The market expects the Federal Reserve to hold to their Average Inflation Targeting (AIT) framework despite a sustained rise in inflation data.

It was clear on Friday when yields failed to move, although the core Personal Consumption Expenditures (PCE) data showed an increase of 3.1% YoY, the highest pick up in nearly thirty years. Shortly after, the University of Michigan published their latest survey showing that consumer sentiment and current economic conditions deteriorated since the previous month. It led to a fast drop of yields across the curve, which pushed 10-year US Treasuries back below 1.6%. Investors conclude that if the macroeconomic backdrop doesn’t strengthen, the Federal Reserve will not taper even if inflation gets really hot.

There is a problem with that rationale.

While the market debates concerning the temporary nature of inflation, nobody knows how much inflation will rise and how long for is going to stay high. The recent University of Michigan survey shows that more than half of the respondents expect inflation to sustain above 3% in the next five years. The same study showed that the median for the expected change in prices during the next year is 4.6%. If that were the case, it is unlikely that Fed’s members won’t start looking at inflation with concern, and the dot-plot will need to advance.

Source: Bloomberg and Saxo Group.

Any discussion concerning tapering or moving in the FOMC dot-plot is pivotal for yields to resume their rise. The latest FOMC minutes provoked a fast correction of breakevens as it suggested that members were open to starting discussing tapering. The move contradicts the “lower for longer” Fed’s mantra. Both breakevens and the inflation swap market right now are indicating that tapering talks may be a probable outcome during the next monetary policy meetings.

Tapering talks is not the only factor that may drive yields higher. Indeed, bonds price on inflation expectations rather than on hard inflation data. Thus, if breakeven rates resume their rise, we can expect bond yields to point higher too. That’s why this week’s jobs numbers are in focus. Last month’s nonfarm payrolls miss put the reflation trade on pause. Suppose the employment report exceeds expectations on Friday. In that case, there is the possibility that breakeven rates start to rise, reviving the reflation trade.

The ISM Services PMI out on Thursday is also forecasted to rise in May, putting more pressures on the reflation trade ahead of the NFP numbers.

Europe Focus: CPI numbers and France 30- and 50-year OAT auction

In Europe, the focus will be on inflation numbers, with the Eurozone consumer price index forecasted to rise 1.9% YoY, the highest in three years and close to the ECB target. Even a slight surprise in this number could push yields higher as tapering fears increase. However, we believe tapering fears in the euro area will be premature. Indeed, the European Central bank will be reluctant even to start thinking about pulling support amid today's disappointment in the monetary aggregate M3, which decreased to 9.2% in April from 10.1% in March. The data shows that credit access might be tightening, although the economy is just starting to emerge from lockdowns.

Not only, but last week’s disastrous Bund auction highlighted the necessity of the ECB to continue with its QE programs, including the PEPP, to support countries’ ongoing financing operations. Last week, the German finance agency had to stop the sale of 15-year Bunds amid weak demand, allocating only €1.7 billion out of the €2.5 billion targets. Demand for Italian 5- and 10-year BTPS on Friday was the weakest since the beginning of the year. That's why it will be essential to monitor government bond auction in Europe this week, particularly in France, as the country is looking to sell bonds of various maturities, among which 50-year OAT (FR0014001NN8). The bonds fell roughly 20% since issuances (January 2021). They are currently pricing 75 cents on the dollar, while yields rose from around 0.55% to 1.15%. Bidding metrics at this auction will be vital to understanding whether market appetite for duration continues to fall. If that were the case, it would reinforce our belief that yields in the euro area need to dramatically rise, with the German elections being the biggest catalyst for such change.

The ECB will be reluctant to pull support within this context and will most likely keep current monetary policies unchanged.

Economic Calendar

Monday, the 31st of May

  • Japan: Retail Trade, Industrial Production
  • China: Non-Manufacturing PMI, NBS Manufacturing PMI
  • Australia: Private Sector Credit
  • Eurozone: Private Loans, M3 and M2 Money Supply
  • Spain: Consumer Price Index
  • Italy: Consumer Price Index
  • United Kingdom: 30-year Bond Auction
  • Germany: Harmonized Index of Consumer Prices
  • Canada: Current Account

Tuesday, the 1st of June

  • Australia: Building Permits, Current Account Balance, RBA Interest Rate Decision and Rate Statement
  • China: Caixin Manufacturing PMI
  • Germany: Retail Sales
  • Switzerland: Real Retail Sales
  • Spain: Markit Manufacturing PMI
  • Italy: Markit Manufacturing PMI, Unemployment
  • France: Markit Manufacturing PMI
  • Germany: Markit Manufacturing PMI, Unemployment Change, Unemployment Rate
  • Eurozone: Markit Manufacturing PMI, Consumer Price Index, Unemployment Rate
  • Canada: Goss Domestic Product, Markit Manufacturing PMI
  • United States: Markit Manufacturing PMI, ISM Manufacturing PMI, ISM Manufacturing Employment Index, 3- and 6-months Bill Auction
  • United Kingdom: BOE’s Governor Bailey Speech

Wednesday, the 2nd of June

  • Australia: Gross Domestic Product
  • United Kingdom: 10-year Bond Auction, Mortgage Approval, M4 Money Supply
  • Germany: 5-year Note Auction
  • Eurozone: Producer Price Index
  • United States:Fed’s Beige Book

Thursday, the 3rd of June

  • Australia: Trade Balance, Retail Sales
  • China: Caixin Services PMI
  • Japan: 10-year Bond Auction
  • France: Markit PMI Composite, Markit Services PMI, 10-, 20-, 30 and 50-year Bond Auction
  • Spain: Markit Services PMI, 3-, 5- and 10-year Bond Auction
  • Italy: Markit Services PMI
  • Germany: Markit Services PMI, Markit PMI Composite
  • Eurozone: Markit Services PMI, Markit PMI Composite
  • United Kingdom: Markit Services PMI
  • United States: ADP Employment Change, Initial Jobless Claims 4-week average, Markit Services PMI, Markit PMI Composite, ESM Services PMI, ISM Service Employment Index, ISM Services Prices Paid
  • United Kingdom: BOE Monetary Policy Report Hearings, BOE’s Governor Bailey Speech

Friday, the 4th of June

  • Japan: Overall Household Spending
  • Eurozone: Retail Sales
  • United States: Nonfarm Payrolls, Average Hourly Earnings, Average Weekly Hours, Unemployment Rate, Factory Orders, Powell speech in the BIS Panel on Climate
  • Canada: Unemployment Rate, Average Hourly Wages, Labour Productivity, Net Change in Employment
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.