14fxM

Today’s bond rally it’s just a chapter, not the whole story

Bonds
Picture of Althea Spinozzi
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Japanese buyers have come to rescue falling US Treasuries. However, the more significant test will come today as the Treasury will sell 30-year bonds following the US CPI readings. With inflation expected to close the year above 4% and GDP expected around 5.9%, it's unlikely that long-term yields will drop despite a slowdown in growth. Therefore, we might see the yield curve to bear-steepen amid tapering expectations first to then bear-flatten as the market considers earlier interest rate hikes. In Europe, strong demand for 30-year Bund and 30-year BTPS is driving yields lower. Yet, we expect Bund yields to rise to break above 0% by year-end amid strong inflation expectations, a new German government and higher yields in the US.


US Treasuries: Japanese buyers are back.

Since the beginning of October, Japanese investors have resumed buying US Treasuries. That provided ample support during yesterday's 10-year bond auction, with the bid-to-cover ratio at 2.58x and indirect bidders taking down 71.1% of the issuance in line with last month.

It was a surprising turnaround following a weak 3-year note auction where indirect bidders fell to 44.2%, the lowest since November. The solid 10-year auction stopped through the When Issued at 1.59% by 0.6bps caused yields to drop further in the secondary market. 

13_10_21_AS1
Source: Bloomberg and Saxo Group.

The big question is whether we will see the same strong demand at today’s 30-year US Treasury auction, following the US CPI readings. The yearly CPI figures are expected to remain in line with the previous reading at 5.3% and the monthly at 0.3%. A surprise on the upside could trigger higher inflation expectations leading yields to rise across the curve. At that point, it will be critical to see whether indirect bidders are coming to the rescue during today's 30-year auction, or they'll be waiting on the sidelines.

13_10_21_AS2
Source: Bloomberg and Saxo Group.

With inflation expected to close the year above 4% and GDP expected around 5.9%, it's unlikely that long term yields will drop despite a slowdown in growth. We could see the US yield curve to bear steepen as the market prepares for the Fed to taper. However, a bear flattening of the yield curve where short-term yields rise faster than long-term yields is more probable, making it possible for 10-year yields to break above their year’s high at 1.77% and continue to rise towards 2%.

German Bunds: not ready for 0% yet.

Yesterday, we saw 10-year Bund yields rising to -0.08% for the first time since May pushing towards zero for the second time since 2019.

However, today we are witnessing a strong reversal driven by German CPI data in line with expectations and a solid 30-year Bund auction.  The auction received a bid-to-cover of 2x, the highest since October 2020. Strong demand can be explained by the fact that 30-year Bund yields rose to the highest since June yesterday, enabling the auction to price with an average yield of 0.35%, the highest since June 2019.

Yet, we still expect Bund yields to rise towards 0% by the end of the year driven by inflation expectations, a new German government and higher yields in the US.

13_10_21_AS3
Source: Bloomberg and Saxo Group.

To strengthen demand for European sovereign bonds was also an exceptionally strong 30-year BTPS auction. Italy sold 30-year bonds at a bid-to-cover ratio of 1.53x, the highest since November 2019. The country also sold 3-year and 7-year notes, which also attracted strong demand. It pushed 10-year BTPS yields to break below their ascending trend line, which led them to test resistance at 0.92%. We still expect Italian 10-year yields to rise during the last quarter of the year and stabilize above 1% by year-end.

13_10_21_AS4
Source: Bloomberg and Saxo Group.

Quarterly Outlook

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • 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

The information on or via the website is provided to you by Saxo Bank (Switzerland) Ltd. (“Saxo Bank”) for educational and information purposes only. The information should not be construed as an offer or recommendation to enter into any transaction or any particular service, nor should the contents be construed as advice of any other kind, for example of a tax or legal nature.

All trading carries risk. Loses 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.

Saxo Bank does not guarantee the accuracy, completeness, or usefulness of any information provided and shall not be responsible for any errors or omissions or for any losses or damages resulting from the use of such information.

The content of this website represents marketing material and is not the result of financial analysis or research. It has therefore has not been prepared in accordance with directives designed to promote the independence of financial/investment research and is not subject to any prohibition on dealing ahead of the dissemination of financial/investment research.

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.