Fixed income market: the week ahead

Fixed income market: the week ahead

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  European sovereign spreads continue to widen following last week’s ECB’s hawkish tilt, putting the ECB in a difficult spot. This week, speeches from Lagarde and other policymakers will be in the spotlight as the market advances interest rate hikes expectations. However, as the BTPS-Bund spread approaches 200bps, the central bank might become more cautious on an early tightening agenda. In the US, the CPI numbers for January will be a focus together with the 3-year, 10-year, and 30-year US Treasuries auctions starting from tomorrow. As the Federal Reserve approaches the end of tapering, the question is whether appetite for government bonds will remain strong despite a bear bond market.


European sovereigns: spreads widen as the market advances interest rates hikes.

Following ECB Knot’s commentary during the weekend, the market is quickly advancing interest rate hikes in the euro area for this year. Investors now expect an interest rate hike of 25bps by September. The market reaction gives us a glimpse of what 2022 will look like with a hawkish ECB, which could terminate QE early (around July, as BofA’s research recently indicates) and hikes rates in September. It doesn’t promise anything good for the periphery. An aggressive ECB takes support away from those countries that need it the most for their recovery, provoking a fast tightening of financial conditions in Southern Europe compared to the north. This is an outcome that the central bank definitively wants to avoid not to revive a political crisis in the euro area.

However, the French election is coming in April. With inflation running at the highest ever for the Eurozone, there is the chance that Macron will not be re-elected in favor of euro-skeptics, which also threatens the real existence of the European Union. Within this complex context, the ECB is given the delicate job to take a monetary decision in March, which might sign the bloc's destiny.

Economically, remaining dovish is not an option, as the euro will weaken, weighing on energy prices, thus bringing more inflation.

Therefore, it’s improbable that the central bank will turn dovish, but it is also true that its hawkishness must have a limit. We see the ECB hawkishness limit drawn by the BTPS-Bund spread as it reaches 200bps. Since the end of the European sovereign crisis in 2013, the spread between the two countries broke and sustained above this level only twice: during the 2018 Italian election and the 2020 Covid pandemic. A BTPS-Bund spread above 200bps has been associated with distress levels in the past. It is likely to happen the same this time around, except that the ECB will not prioritize it until the French election is over in April.

This week bond investors are better to focus on ECB’s speakers, starting today with Lagarde speaking at the hearing of the European Parliament’s Economic and Affair Committee. We will also hear from De Cos, Villeroy, Guindos, and Lane throughout the week. The European Commission's economic forecasts released on Thursday are also in focus, which will probably see a revision in growth and inflation forecasts.

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

US Treasuries: CPI numbers and US Treasuries auction in focus.

Amid a hawkish BOE and ECB last week, US Treasury yields resumed their rise, with 10-year yields breaking above 1.88% for the first time since January 2020. The market is waiting impatiently for the CPI numbers on Thursday, expected to come out at 7.3%, the highest since 1981. The question is whether the market will advance interest rate hikes and price a 50bps rate hike in March, on the back of it contributing to another selloff in US Treasuries.

Data concerning the trade balance will also be in the spotlight as an increase of the trade deficit requires foreign investors to step up their purchases of US assets while the Federal Reserve is ending bond purchases and more buyers are needed to support the trade budget. Therefore, bidding metrics during the next three days' 2-year, 10-year, and 30-year US Treasuries auction will be in focus. During the auction of the same tenors in January, we have seen indirect bidders step up purchases of all issuance except for the 10-year Bonds as yields were rising. Now that yields are way higher and 10-year eur-hedged US Treasuries offer 100bps over the Bund, it's safe to expect demand to be sustained. However, will investors buy government bonds carrying a high duration as we enter a bond bear market?

Source: Bloomberg and Saxo Group.

Economic Calendar

Monday, February the 7th

  • Australia: TD Securities Inflation (Jan)
  • China: Caixin Service PMI (Jan)
  • Switzerland: Unemployment Rate (Jan)
  • Germany: Industrial Production (Dec)
  • Eurozone: Sentix Investor Confidence (Feb)
  • United States:  Consumer Credit Change (Dec), 3-month and 6-month Bill Auction

Tuesday, February the 8th

  • Japan: Overall Household Spending (Dec), Current Account (Dec)
  • France: Current Account (Dec)
  • Italy: Retail Sales (Dec)
  • United States: NFIB Business Optimism Index (Jan), Goods and Service Trade Balance (Dec), 3-year Note Auction
  • Canada: International Merchandise Trade (Dec)

Wednesday, February the 9th

  • United Kingdom: BRC Like-For-Like Retail Sales (Jan)
  • New Zealand: RBNZ Inflation expectations (Q4)
  • Germany: Current Account (Dec), Trade Balance (Dec), 30-year Bund Auction
  • Italy: Industrial Output (Dec)
  • United States: MBA Mortgage Applications, Wholesale Inventories (Dec), 10-year Bond Auction
  • Canada: BoC’s Governor Macklem speech

Thursday, February the 10th

  • Australia: Consumer Inflation Expectations (Feb)
  • China: M2 Money Supply (Jan), New Loans (Jan)
  • Eurozone: European Commission releases Economic Growth Forecasts
  • United Kingdom: NIRS GDP Estimate (Jan)
  • United States: Consumer Price Index (Jan), Consumer Price Index ex Food & Energy (Jan), Initial Jobless Claims, 4-week Bill Auction, 30-year Bond Auction, Monthly Budget Statement (Jan)

Friday, February the 11th

  • New Zealand: Business NZ PMI (Jan)
  • United Kingdom: Gross Domestic Product (Dec), Gross Domestic Product (Q4) Prel), Industrial Production (Dec), Manufacturing Production (Dec), Total Business Investment (Q4) Prel, Total Trade Balance (Dec)
  • Germany: Harmonized Index of Consumer Prices (Jan)
  • Italy: 3-year and 7-year BTPS Auction
  • United States: Michigan Consumer Sentiment Index (Feb) Prel

Quarterly Outlook

01 /

  • 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

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • 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, ...
  • 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

  • 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

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.