Fixed income market: the week ahead Fixed income market: the week ahead Fixed income market: the week ahead

Fixed income market: the week ahead

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  This week's FOMC meeting will be an important focus for all assets. Although we expect the central bank to keep monetary policy unchanged, a rise in dot plot projections may signal hawkishness. It could provoke a fast surge of 10-year US Treasury yields back above 1.50%. Yet, there is potential for yields to break below 1.40% and find support at 1.20% before they resume their rise if the Federal Reserve keeps dovish. In Europe, the focus will be on Wednesday's 10-year German Bunds auction as they have recently been suffering from weak demand. A drop in appetite in Bunds may indicate that rotation from European sovereigns to the US peers has started, putting at risk German, French, Spanish and Portuguese government bonds. Finally, in England, the focus will be on possible extension lockdown measures, adding pressure to Gilt yields.

US Treasuries might gain further from this week’s FOMC meeting, but it will be short-lived

We are not surprised by last week's drop in yields for two reasons: the amount of liquidity in the market remains high, and rotation from lower-yielding sovereigns is compelling. These forces put pressure on both the front and the long part of the yield curve. Besides, they have hindered yields from rising amid high CPI numbers, causing investors to unwind short Treasuries positions. Unless there is a sudden change in the central bank’s message, we expect these factors to continue to weigh on yields until Jackson hole, where we anticipate the Federal Reserve to begin engaging with tapering discussion.

It doesn't mean that there isn't a risk for a surprise this week. So far, Jerome Powell has stuck to the Average Inflation Target (AIT) framework and reinforced the idea that inflationary pressures are temporary. Consequently, the bond market has accepted that interest rates will be lower for longer. However, the dot plot might be telling a different story this week if projections move higher for 2023. If that were the case, the transitory nature of inflation might start to become less credible, and yields may resume their rise.

Tomorrow the US Treasury is going to issue 20-year Bonds. In recent auctions, we have seen bidding metrics improving considerably for US Treasuries. For example, foreign investors’ demand for last week’s 10-year bonds was close to the highest seen since January 2020. Also, indirect bidders' demand was above the 5-year average at the 30-year auction on Thursday, despite the highest CPI reading since the global financial crisis in 2008. The reason for an increase in foreign demand might lie within falling USD hedging costs. It gives an advantage to investors to sell government bonds in their countries and lock in a higher yield in US Treasuries. Currently, EUR hedged 10-year US Treasuries pay a yield of 0.75%, a much higher yield than many government bonds in Europe.

In the case of a dovish Federal Reserve meeting, we might see 10-year US Treasury yields trying their support at 1.40%. If they break this level, they will find support at 1.20% next.

Source: Bloomberg and Saxo Group.

Suppose the dot plot projections show that members are increasingly more hawkish. In that case, we could see yields rising back above 1.5% to find resistance at 1.60%.

However, in the long-term, yields will need to rise. The transitory nature of inflation is subjective, and it depends on the way you look at it. The current spike will be short-lived, and we can expect inflation to normalize by the end of this year or by the beginning of 2022. Yet, the question is at what level it will normalize. Indeed, suppose inflation keeps supported at a much higher level than what we are accustomed to. In that case, the central bank will not have any other choice than to taper and hike interest rates. That’s why it’s crucial to reduce noise and to focus on data that signal whether inflation might keep supported for an extended period. The rise in wages and primary home rentals are pointing to something lasting, even if a great part of the current surge in prices is transitory. The latest CPI numbers show that food away from home has risen, making us wonder whether it is a way for restaurant owners to pay higher wages. We will know more about the transitory nature of inflation in the third quarter of the year. However, for long-term bond investors, it’s key to recognize that there is more downside in holding US Treasuries than upside. Indeed, if 10-year yields drop to 1%, it would represent a capital gain of roughly 4%. Yet, if yields rise to 2.5%, the loss on capital would be 9%, and it could be greater depending on at what level inflation will stabilize.

Source: Bloomberg and Saxo Group.

Rotation poses a threat to European sovereigns

In Europe, the focus will be on the United Kingdom and whether the country will need to extend its lockdown measures in light of rising Covid-19 related cases. The country's vaccination program is well advanced, yet new strains are causing a rise in hospitalization. It could hamper the speed of an economic rebound forecasted by the Bank of England since the beginning of the year.

Last week, 10-year Gilt yields broke below the ascending trading range they have been trading since February, driven by the drop in yields in the US. This morning they are testing their 100 days simple moving average at 0.70%, and if they break below this level, they will find support at 0.65% next. The Debt Management Office will sell 7- and 30- year Gilts tomorrow and 15-year Gilts on Wednesday. Demand at these auctions might give an insight into investors' expectations on the recovery.

Source: Bloomberg and Saxo Group.

News of an extension of a lockdown in the UK could weigh on European sovereigns, too. However, our focus will be on rotation. Recent German Bund auctions showed demand is lacking for these sovereigns. One of the reason might be that we start to see a rotation from European sovereigns to the US safe-heaven. This week the German Finance Agency is issuing 10-year Bunds. Suppose demand in Bund is lagging, but demand is solid at tomorrow’s 20-year US Treasury auction. In that case, it may indicate that investors have started to rotate from lower-yielding European government bonds to US peers.

At the latest 10-year Bund auction, we have seen the bid-to-cover ratio dropping to 1.28x, the lowest since March last year. The lowest accepted bid was 100.9, the lowest since February 2019, showing that for appetite for these securities continues to fall. Rotation will pose a threat not only to Bunds but also to other lower-yielding sovereigns such as France, Spain and Portugal. Italian BTPS will be able to weather losses better as they are currently offering the highest yield in the bloc.

Economic Outlook

Monday, the 14th of June

  • Japan: Industrial Production
  • Eurozone: Industrial Production
  • United States: 3- and 6-month Bill Auction

Tuesday, the 15th of June

  • Australia: RBA Meeting Minutes, House Price Index
  • United Kingdom: Claimant Count Change, ILO Unemployment Change, Average Earnings, 7- and 30-year Gilts Auction
  • Germany: Consumer Price Index, Harmonized Index of Consumer Prices, 2-year Note Auction
  • France: Consumer Price Index
  • Italy: Consumer Price Index
  • Eurozone: Trade Balance
  • United States: Retail Sales, Producer Price Index, 20-year Bond Auction

Wednesday, the 16th of June

  • Japan: Merchandise Trade Balance Total, Machinery Orders
  • China: NBS Press Conference, Industrial Production, Retail Sales
  • United Kingdom: Consumer Price Index, Retail Price Index, PPI Core Output, 15-year Gilts Auction
  • Eurozone: Labor cost
  • Germany: 10-year Bond Auction
  • United States: Building Permits, Housing Starts, FOMC Economic Projections, Fed Interest Rate Decision, Fed Monetary Policy Statement FOMC Press Conference
  • Canada: Consumer Price Index

Thursday, the 17th of June

  • Australia: RBA’s Governor Lowe speech, Fulltime Employment, Employment Change, Unemployment Rate, Participation rate
  • Switzerland: SNB Financial Stability Report, SNB Interest Rate Decision and Monetary Policy Assessment
  • Italy: Trade Balance
  • Spain: 3-, 5- and 10-year Bond Auction
  • Eurozone: Eurogroup Meeting, Conversion Price Index
  • United States: Philadelphia Fed Manufacturing Survey, Initial Jobless Claims, 5-year TIPS Auction

Friday, the 18th of June

  • Japan: BoJ Interest Rate Decision and Monetary Policy Statement
  • United Kingdom: Retail Sales
  • Germany: Producer Price Index
  • Eurozone: EcoFin Meeting, Current account


The Saxo 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 is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

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