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

Head of Fixed Income Strategy

Summary:  We believe that the Federal Reserve will stick to its hiking plan or become even more aggressive as the economy remains strong, but elevated inflation pressures persist. Therefore, there continues to be space for the US yield curve to bear-flatten. Although 2-year yields are currently pricing rate hikes for the whole year, they could continue to soar to 2.5% as the Federal Reserve maintains hawkish. Within this context, long-term yields are unlikely to drop until there are clear signs of stagnation. Things could change during the second half of the year if the probabilities of a contraction rise.


Last week's central banks' monetary policy meetings left the market reassessing inflationary risks and the growth outlook. 

Breakeven rates soared substantially, with the 5-year breakeven rate rising to 3.67% on Friday, the highest on record. The US yield curve continued to flatten with the 3s10s spread inverting for the first time since 2007. The move indicates that bond investors are increasingly worried that the Federal Reserve's aggressive monetary policies will contribute to a noticeable slowdown in growth.

Yet, the Fed completely dismissed these worries. Indeed, in its updated economic projections, growth remains above 2% until 2024. The unemployment rate will maintain somewhat stable, increasing in 2024 from 3.5% to 3.6% only.
Source: Bloomberg and Saxo Group.

Although it's challenging to forecast the economic outlook due to the evolving situation in Ukraine, it’s fair to assume that the Fed will stick to its hiking plan to fight inflation. Suppose the central bank is concerned about a slowdown in growth. In that case, it will look to front-load interest rate hikes this year as the economy remains strong and the choice to fight inflation remains popular. Therefore, it’s safe to expect the yield curve to continue to bear-flatten.

Since last week, two-year US Treasury yields have been testing strong resistance at 2%, a level previously seen in May 2019, when the Fed fund rate was 2.5%. The Fed is looking to bring the benchmark rate at 2% by the end of the year and 2.75% in 2023. Suppose markets deem this hiking path to be realistic. In that case, there is definitively room for 2-year US Treasury yields to begin to price rate hikes for 2023 throughout the year. Yet, rate hikes for this year have already largely been priced in the front part of the yield curve. Therefore, two scenarios are possible: either growth remains sustained throughout the year, giving the green light to the Fed to hike rates as planned, or growth will get seriously hit in the second half of the year, forcing the market to reconsider rate hikes for 2023. We would probably see 2-year yields moving towards 2.5% in the first scenario. In the second scenario, the front part of the yield curve would remain around the values we see today.

We believe that there is a bigger chance of seeing 2-year yields breaking above 2% in the short term and remaining sustained above this level until summer as the central bank's language has become hawkish. However, as the macroeconomic outlook becomes clearer, there are chances that the market begins fearing a recession. In that case, 2-year yields would remain around the levels we are currently seeing.

Similarly, we don't believe that long-term yields will plummet unless there are clear signs of stagnation, which might not surface until the year's second half.

Source: Bloomberg and Saxo Group.

This week's focus is on the Fed officials' speeches, starting today with Powell commenting on the economic outlook at the National Association for Business Economics annual conference. Powell will also speak on Wednesday in front of the Bank for International Settlements. We'll also hear from Williams, Daly, Mester, Kashkari, Waller, and Evans

 throughout the week.

The 2-year and 20-year US Treasury bond auctions on Wednesday will also be in focus. It will be critical to see how investors position in the short-term versus the long-term of the yield curve in light of last week's FOMC meeting.

What's going on elsewhere?

In Europe, the focus will be on the PMI data and ECB officials speaking. Lagarde is speaking today and tomorrow.

Although Russia avoided defaulting on its own debt last week, it's a matter of time before we see defaults rising in that part of the world. Sadly, the Ukrainian poultry, grain, and meat producer MHP is the first Ukrainian company to default on its US dollar debt due to the war.

In Venezuela, government and PDVSA bonds have jumped from 6 to 10 cents on the dollar as investors speculate on a US deal.

Economic calendar

Monday, March the 21st  

  • New Zealand: Trade Balance
  • China: PBoC Interest Rate Decision
  • Germany: Producer Price Index (Feb), German Buba Monthly Report
  • United States: Chicago Fed National Activity Index, 3-Month and 6-Month Bill Auction, Powell speaks at NABE, Bostic speaks

Tuesday, March the 22nd

  • New Zealand: Westpac Consumer Survey
  • Australia: RBA’s Governor Lowe’s speech
  • Eurozone: Current Account (Jan), Construction Output (Jan)
  • Canada: Industrial Product Price Index (Feb)
  • United States: Redbook Index, Richmond Fed Manufacturing Index, 52-Week Bill Auction, Williams, Daly, and Mester speak

Wednesday, March the 23rd

  • United Kingdom: Consumer Price Index (Feb), PPI Core Output (Feb), Producer Price Index – Input (Feb), Retail Price Index (Feb)
  • Eurozone: Non-monetary Policy ECB Meeting, Consumer Confidence (Mar) Prel
  • United States: New Home Sales (Feb), 20-year Bond Auction, Powell speaks at the BIS Panel, Daly, Bullard speak

Thursday, March the 24th

  • Australia: Commonwealth Bank Manufacturing PMI (Mar) prel
  • Japan: BoJ Monetary Policy Meeting Minutes
  • France: Markit Manufacturing PMI (Mar) prel, Markit PMI Composite (Mar) prel, Markit Services PMI (Mar) prel
  • Germany: Markit Manufacturing PMI (Mar) prel, Markit PMI Composite (Mar) prel, Markit Services PMI (Mar) prel
  • Eurozone: Economic Buletin, Markit Manufacturing PMI (Mar) prel, Markit PMI Composite (Mar) prel, Markit Services PMI (Mar) prel
  • United Kingdom: Markit Manufacturing PMI (Mar) prel, Markit Services PMI (Mar) prel
  • United States: Nondefense Capital Goods Orders ex Aircraft (Feb), Initial Jobless Claims, Durable Goods Orders (Feb), Markit Manufacturing PMI (Mar) prel, Markit PMI Composite (Mar) prel, Markit Services PMI (Mar) prel, 4-Week Bill Auction, Bullard, Kashkari, Waller, Evans, and Bostic speak

Friday, March the 25th

  • Japan: Tokyo Consumer Price Index (Mar), Foreign Bond Investment, Foreign Investment in Japan Stocks
  • Eurozone: EU Leaders Summit, M3 Money Supply (Feb),  M3 Money Supply (Feb), Private Loans (Feb)
  • United Kingdom: GfK Consumer Confidence (Mar), Retail Sales (Feb), Retail Sales ex-fuel (Feb)
  • Spain: Gross Domestic Product (Q4)
  • Italy: Business Confidence (Mar), Consumer Confidence (Mar), Trade Balance (Feb)
  • Germany: IFO- Business Climate, Current Assessment, and Expectations (Mar)
  • United States: Michigan Consumer Sentiment Index (Mar), Pending Home Sales (Feb), Daly, Waller, Williams, and Barkin speak

 

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