Across the Atlantic, the European Central Bank will need to prove its intention to cap the rise in yields by increasing its QE purchases, and we will know that today as the central bank publishes the latest bond-buying figures. The ECB's problem is that, while monetary and fiscal policies go hand in hand in the United States, Europe lacks fiscal help. The money agreed under the Next Generation EU Recovery Plan last year still needs to be disbursed, and another fiscal package will not come about this year as Germany is going through elections. This leaves the ECB alone in supporting and stimulating the European economy. That's why a sustained selloff in European sovereigns might tighten EU financial conditions putting in peril the central bank's efforts. Today ECB’s President Lagarde speaks, and it's imperative to understand whether the central bank is ready to do whatever it takes to rescue the euro area. If her words are not convincing enough, we might be headed to another week of selloff, which might become expensive for countries issuing long-term bonds this week such as Germany, Spain and France. Spain is running the risk to see a choppy 7-, 10- and 15-year government bond auction on Thursday. Bidding metrics for the periphery's long-term bonds have not been consistent since the beginning of the year. If the ECB fails to turn market sentiment by Thursday, bearish sentiment might leak from the primary to the secondary market and provoke even a deeper selloff of sovereigns within the periphery.
In the United Kingdom, the market is waiting for Rishi Sunak’s Budget announcement on Wednesday, which many expect to unveil a GBP 5 billion grant scheme. Such an announcement could push Gilt yields to break above their resistance line at 0.85% that will inevitably see them rising fast towards 1%. The year-to-date rise in yields has been impressive in the UK, with 10-year yields rising by 60 basis points. Despite Bank of England's speakers seem not concerned about the imminent rise in yields as they attribute it to good news from strong growth expectations, we believe that if 10-year Gilts break above 1%, the central bank might need to reconsider its position. The rise in yields has preceded an economic recovery, and Governor Bailey recently explained that economic data for the first quarter of the year would not be encouraging. Besides Sunak's Budget, Thursday's 10-year Gilt auction will be key to setting Gilts' path towards 1%.