Fixed income market: the week ahead

Fixed income market: the week ahead

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Inflation is driving the bond market and monetary policies. Therefore, this week's inflation readings out from the US and Germany and long-term bond auctions in the US, Germany and Italy can be catalysts for a deeper selloff in the government bond space. In the US, long-term Treasuries aren't benefitting anymore from support coming from the debt-ceiling issue, leaving 10-year yields free to rise towards 1.70%. Gilt yields will continue to soar in the UK, and the yield curve will flatten as investors price early interest rate hikes. In Europe, government bonds are feeling the same pressures at play in the US and the UK. Besides German inflation readings on Wednesday, the 30-year Bunds and 30-year BTPS auctions will be in focus as weak bidding metrics could intensify bearish sentiment in the European sovereign space.


US Treasuries are poised to suffer this week.

Last week, the debt ceiling was extended until December, removing critical support for long-term Treasuries.

The debt-ceiling provided critical support for long term US Treasuries as they were providing safety amid a spike of volatility in money markets. Now that the US isn't running any longer into an imminent risk of default, the flight to safety, which was capping long term yields, has been removed. It means that US yields are free to rise amid this week CPI readings and long term bond auctions.

The nonfarm payrolls report on Friday did little to deter bond bears. Although the economy added just 194,000 jobs, the lowest since the beginning of the year, 10-year yields rose to break their resistance at 1.60%, showing that investors are focusing more on inflation rather than jobs. Indeed, unemployment fell more than expected to 4.8%. At the same time, the monthly average hourly earnings remain elevated, hinting at lasting inflation ahead.

That’s why the consumer price inflation data coming out on Wednesday are crucial for the bond market. Economists expect the CPI for September to match the one of August, showing a monthly increase of 0.3%, leaving the annual inflation gain at 5.3%. Any surprises on the upside could provoke yields to continue their rise towards 1.70%. According to a Bloomberg report, with 10-year yields above 1.60%, the bond market runs into the risk of convexity hedging. Convexity hedging happens when Mortgage-Backed Security (MBS) holders need to sell long-term bonds to decrease the duration of their overall portfolio. If that were the case, 10-year yields could quickly rise to test their yearly high at 1.77%.

Always on Wednesday, the US Treasury will sell 30-year bonds, and the FOMC Minutes will be released. They have the potential to apply even more pressure on the long part of the yield curve. Investors will be addressing the FOMC Minutes carefully, trying to understand what Jerome Powell meant last month when he said he'd need to see a "decent” jobs report to taper in November. We believe that despite the weak nonfarm payrolls, there are clear signs of recovery in the labor market. However, inflation is becoming a more pressing issue, forcing the central bank’s to finally taper.

Producer price inflation on Thursday and retail sales on Friday will also be important. Retail sales are expected to have decreased due to a plunge in vehicle sales caused by supply-chain disruptions. That's why it will be essential to look at these numbers in detail: as vehicle sales drop, other retail sales might rise.

Source: Bloomberg and Saxo Group.

Gilts will continue to tumble.

This week is going to be a pivotal week also for the UK. The British economy is slowing down while inflation expectations rise due to supply chain disruptions and staff shortages. Therefore, the market’s focus will be on Tuesday’s unemployment and wage data and Wednesday’s GDP, industrial and manufacturing data.

During the weekend, BOE’s Michael Saunders said in an interview that households should get ready for “significantly earlier” interest rate hikes, putting even more pressure on Gilts. The bond market reacted badly to the news this morning. Ten-year Gilt yields opened at 1.19%, the highest since May 2019. Two-year gilts rose to 0.60%, the highest since January 2020. As inflationary pressures become more pronounced, we anticipate yields to continue to soar and the yield curve to flatten as investors price early interest rate hikes.

The Gilt-Bund spread widened to 130bps, a level previously seen in 2016. We expect this spread to widen as much as 150bps as the market prepares for BOE’s interest rate hikes. However, by the end of the year, the Gilt-Bund spread is likely to narrow to current levels as inflation expectations, the German election and higher yield in the US will force Bund yields higher.

Source: Bloomberg and Saxo Group.
Source: Bloomberg and Saxo Group.

European sovereigns feel the inflation heatwave, too.

European government bond yields are feeling the same pressures as in the US and the UK, with one exception: the eurozone yield curve is not pricing rate hikes until 2024.

This morning 10-year Bund yields opened at -0.13%, breaking above their resistance at -0.15% for the first time since July.

We expect European yields to soar together with yields in the US this week. The German ZEW Economic sentiment on Tuesday and inflation readings on Wednesday might be catalysts for more volatility. To make things worse, the German DMO office will issue 30-year Bunds testing market appetite for duration.

Always on Wednesday, Italy will sell 3-year, 7-year and 30-year BTPS testing market appetite for the periphery. Any weakness in biding metrics could intensify the selloff within the European bond space. 

Source: Bloomberg and Saxo Group.

Economic Calendar

Monday, October the 11th

  • United States: Columbus day- the bond market is closed
  • Italy: Industrial Production

Tuesday, October the 12th

  • Japan: Bank Lending, PPI MoM (Sept), 30-year JGB Auction
  • Australia: NAB Business Confidence (Sept)
  • Germany: Wholesale Prices (Sept)
  • United Kingdom: Claimant Count Change (Sept), Average Earnings (Aug), Employment change (July)
  • Eurozone: ZEW Economic Sentiment Index (Oct)
  • Germany: ZEW Economic Sentiment Index (Oct), 2-year Schatz Auction
  • United States: NFIB Business Optimism Index (Sept), JOLTs Job Openings (Aug), NY Fed Treasury Purchases 10 to 22.5 years, Consumer Inflation Expectations (Sept), 3-year Note Auction, 10-year Note Auction

Wednesday, October the 13th

  • Japan: Reuters Tankan Index (Oct), Machinery Orders (Aug)
  • Germany: Harmonized Inflation Rate (Sep), 30-year Bund Auction
  • United Kingdom: Balance if Trade (Aug), GDP 3-month avg (Aug), Industrial Production (Aug), Manufacturing Production (Aug), GDP (Aug)
  • Eurozone: Industrial Production
  • Italy: 3-year, 7-year, 20-year and 30-year BTP auction
  • United States: MBA 30-year Mortgage Rate (Oct), Inflation Rate (Sept), NY Fed Treasury Purchases 4.5 to 7 years, 30-year Bond Auction, FOMC Minutes

Thursday, October the 14th

  • Australia: Westpac Consumer Confidence Index (Oct), Employment Change, Full-Time Employment (sept)
  • China: Inflation Rate (Sept), PPI (Sept), M2 Money Supply (Sept), Total Social Financing (Sept), Outstanding Loan Growth (Sept)
  • Japan: Industrial Production (Aug), Capacity Utilization (Aug)
  • Spain: Harmonized Inflation Rate (Sept)
  • Canada: Manufacturing Sales (Aug)
  • United States: Initial Jobless Claims (Oct), Jobless Claims 4-week Average, PPI (Sept), NY Fed Treasury Purchases 22.5 to 30 years, 4-week and 8-week T-Bill Auction

Friday, October the 15th

  • Australia Consumer Inflation Expectations (Oct)
  • Eurozone: New Car Registrations, Balance of Trade (Aug)
  • France: Harmonized Inflation Rate (Sep)
  • Italy: Harmonized Inflation Rate (Sep), Balance of Trade
  • Canada: PPI (Sept), Wholesale Sales, New Motor Vehicle Sales
  • United States: Retail Sales (Sept), Import Prices, Export Prices, NY Empire State Manufacturing Index (Oct), Business Inventories (Aug), Michigan Consumer, Inflation, Current Conditions (Oct)

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

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

Disclaimer

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 (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.