Fixed income weekly Wrap Fixed income weekly Wrap Fixed income weekly Wrap

Fixed income weekly Wrap

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The reflation trade in the US and a hawkish Bank of England have inflicted painful losses to bondholders this week. Thirty-year US Treasury yields rose to the highest level in a year. In England, an unexpected message from the BOE pushed the Gilt yield curve higher. Investors holding Italian debt close the week happy as bullish sentiment arising from the possibility of a Draghi government pushed BTPs higher.

While investment-grade and junk corporate yields were stable this week, government bonds sent strong signals in the United States, United Kingdom and Italy. In this article, we look at this week's top events and attempt to understand what can come next.

US yield curve continues to steepen inflicting losses to bondholders

This week, the reflation story has picked up the pace. The 5s30s spread is the widest in six years, and 30-year yields are trading above 1.9%, the highest level seen since February 2020.

The nonfarm payrolls coming out today might give another push Treasury yields higher if the data surprises on the upside.  If that were to materialize, the 30-year yields would rise to test their resistance at 2%.

Regardless of what will happen with the nonfarm payrolls today, we believe the yield curve is trading in an uptrend and will continue to steepen. To put pressure on US Treasury yields are the inflationary forces coming from easy monetary policies, fiscal stimulus and a possible pick up of the velocity of money later in the year.

Since the beginning of January, US Treasury bonds across the yield curve have reported an average loss of 1.35%. At the same time bonds with a maturity longer than 20-years have recorded a loss of 5.15%. As yields continue to rise, it becomes crucial to building a buffer against rising yields by seeking coupon income.

Source: Bloomberg

Gilts selloff amid hawkish Bank of England

Yesterday’s Bank of England monetary policy meeting surprised the bond market. Ahead of the BOE's press conference, the money market was partially pricing a rate cut this year with Gilts up to five years providing negative yields. Although the BOE adjusted the economic growth outlook down, the central bank acknowledged that the economy is heading for a rapid pick up due to a fast pace of vaccinations. It was enough to weaken expectations concerning further interest rate cuts and cause an immediate shift up the Gilt yield curve as well as a slight steepening.

Without more stimulus coming from the BOE, 10-year Gilt yields will rise to test the upper trendline at 0.5% of the trend channel they have been trading since August. Once they have broken above this level, they will find resistance at 0.65%. If that were to happen, ten-year Gilts would record a loss of 3.5%, or bigger if yields continue to rise. However, if there are unexpected delays with the vaccination program or the economy doesn't recover as fast as expected, a dovish sentiment might push yields down, but not lower than the benchmark rate at 0.1% representing a capped gain of 2%.

This strengthens our belief that Gilts have lost their risk mitigation purpose and that more downside can come from mixed BOE communication as well as from a fast recovery of the economy.

Source: Bloomberg.

The “Draghi Effect” pushes the BTP-Bund spread below 100bps, the tightest since 2015

The spread compression trend between the BTP and the Bund has accelerated amid Draghi entering in the Italian political scenario. The 10-year BTP-Bund spread has tightened to levels previously seen in 2015, and now there is the potential for it to tighten further to 75bps, a level previously seen in 2010.

Yet, the market is losing focus, because while the 10-year BTP-Bund spread tightens, longer maturities are experiencing a more significant upside. Since the beginning of last week, the yield on 30-year BTPs has fallen by 18bps providing a capital appreciation of around 4%. We Believe there is room for the 30-year BTP-Bund spread to tighten as much as 120bps contributing to another capital gain of more than 4%. In the long-term, the difference between ten and thirty-year spreads will diminish, making appetible for Italy to increase issuance in the long part of the yield curve. It is then that the country might consider issuing BTP with maturities of more than 50 years.

Source: Bloomberg

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

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

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 (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

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

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

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.