Fixed income market: the week ahead

Fixed income market: the week ahead

Bonds
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  Bond yields in the US, UK, and Europe have broken above critical resistance levels, entering a fast area that could take them even higher. In Europe, flash CPI data are likely to weigh more on the bond market than the German election this week. Indeed, a coalition is not likely to be formed quickly, failing to provide direction for Bunds. However, high CPI figures might raise speculations that hawkish members of the ECB will push for a PEPP taper without an equal increase of purchases under other ECB's programs. In the US, weak growth data might underpin US Treasuries. Still, tomorrow's 7-year note auction and Friday's PCE deflator figures might add to bearish sentiment, putting pressure on the long part of the yield curve. The debt ceiling will be a crucial topic for the bond market during the whole month of October and could have severe repercussions for the front end of the yield curve.


Bond yields in the US and Europe broke above critical resistance levels, entering a fast area that could take them even higher. That's why the German election, inflation and growth data are going to set market sentiment this week.

German election: a tight race means Bunds are more vulnerable to rising yields in the US until a coalition is formed

Social Democrats (SPD) secured a slim advantage over the Christian Democrats (CDU/CSU), opening up for a period of negotiations in which both parties will try to secure a ruling coalition. Bunds opened flat this morning and will probably struggle to find direction until negotiation discussions become clearer. In an analysis published last week, we have indicated that Bund yields might rise and turn positive by the end of the year regardless of the coalition that will be formed. A Traffic light (SPD + Greens + FDP) or Kenya (CDU/CSU + SPD + Greens) coalitions will probably see Bund yields rising and stabilizing around 0.2%. In contrast, the spread between Italian BPTS and Bunds will tighten to levels previously seen before the European debt crisis, to roughly 75bps.

German Bund yields broke above -0.25% last week, and they are now trading in a fast area which could take them quickly to -0.15% or back down below -0.25%. US Treasury yields are more likely to set direction in the upcoming days rather than the German election. If yields in the US continue to rise, they will also provoke German bund yields higher.

Besides the German election and US Treasury yields, Eurozone CPI figures on Friday can also dictate sentiment within the European sovereign bond market. The CPI Index rose 3% in August from 2.2% in July. The core CPI remained at 1.6%, giving a more accurate picture of inflation in the Eurozone during the past decade. Yet, another high CPI read can spark speculations that hawkish ECB members might push for a PEPP taper without an equal increase of purchases under other ECB's programs. That would leave the European sovereign space vulnerable to another selloff.

Source: Bloomberg and Saxo Group.

US Treasuries: debt ceiling, GDP and PCE figures in focus.

Ten-year Treasury yields have broken above 1.4% and sustained trading above this level for the first time since June. They happen to be in a fast area which seems to be leading them quickly above 1.5%. Things are moving fast today, with yields rising across the yield curve. Ten-year yields broke briefly above 1.5% following US durable goods orders data, exceeding expectations by more than double. Five-year yields are flirting with their 1% resistance, a level that they haven't crossed since March 2020. If they break above this level, they enter a fast area that could take them quickly to 1.2%. Lastly, 30-year yields are testing resistance at 2%. Yet, yields have the potential to slow down their rise as economic data might confirm a deceleration in growth on Thursday, putting a cap on yields.

As we enter October, a topic becoming more and more relevant to US Treasuries is the debt ceiling. Congress is struggling to find bipartisan support to raise the debt ceiling. The US Treasury secretary, Janet Yellen, warned that if an agreement is not reached, the country will run the risk of defaulting on its own debt by the end of October. We exclude the government will accept a default, forcing Democrats to extend the debt ceiling under their partisan multi-trillion-dollar tax and spending plan. However, the later such an extension arrives, the more profound implications for the bond market. To refinance existing maturing debt, the US Treasury needs to sell large volumes of T-Bills in a short period, provoking what can be called Quantitative Tightening (QT). Despite the RRP facility continues to hit new records signaling that liquidity in the money market is unusually high, a sudden large increase of T-Bill issuance can be difficult to digest even for a yield-hungry money market, leading to a bear flattening of the yield curve.

However, the long part of the US yield curve is more likely to be volatile than the front end this week as the market will focus on inflation and growth. On Thursday, GDP figures might show that the economic rebound has been slower than expected at the beginning of the year despite four consecutive quarters of expansion. Additionally, the Evergrande fallout poses a threat to global growth. Thus, GPD data might underpin US Treasury yields ahead of Friday' PCE deflator. Consensus expects prices to have stabilized in August and the PCE Deflator to rise slower than July, keeping the year-over-year figure flat at 4.2%. Investors will be looking at signals of whether inflation might be transitory or not, especially in light of recurrent supply chain disruptions as well as high energy prices. A strong PCE number might lead the Federal Reserve to a more aggressive tapering, especially if there are signs of persistent inflation. At that point, the market will need to consider earlier interest rate hikes leading to a bear steepening of the yield curve.

Bond auctions are also pivotal this week, with the US Treasury issuing 2-year and 5-year notes today and 7-year notes tomorrow. Investors will closely watch tomorrow's 7-year auction as in February, it sparked a widespread selloff due to lack of demand. We expect demand to be solid; however, it's critical to understand whether investors' appetite for US Treasuries is decreasing now that yields are moving higher.

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

Economic calendar

Monday, September the 27th

  • Japan: Leading Economic Index
  • Eurozone: Loans to Households, Loans to Companies, M3 Money Supply
  • Spain: Producer Price Index
  • France: Unemployment Benefit Claims, Jobseekers Total
  • United States: Durable Goods Orders, Dallas Manufacturing Index, NY Fed Treasury Purchases 10 to 22.5 years, 2-year and 5-year Note Auction
  • Canada: 10-years Bond auction

Tuesday, September the 28th

  • Japan: BoJ Monetary Policy Meeting Minutes
  • Australia Retail Sales
  • Germany: GfK Consumer Confidence
  • United Kingdom: 30-year Treasury Gilt Auction
  • United States: Goods Trade Balance, Wholesale Inventories, Redbook, S&P/Case-Shiller Home Prices, House Price Index, CB Consumer Confidence, Richmond Fed Manufacturing Index, NY Fed Treasury Purchases 2.25 to 4.5 years, 7-year Note Auction

Wednesday, September the 29th

  • Spain: Harmonized Inflation Rate
  • Italy: Producer Price Index
  • United Kingdom: BoE Consumer Credit, Mortgage Lending, Mortgage Approvals
  • Eurozone: Consumer Confidence, Economic Sentiment, Industrial Sentiment, Service Sentiment, Consumer Inflation Expectations
  • Germany: 10-year Bund Auction
  • Italy: 5-year and 10-year BTP auction
  • Spain: Business Confidence
  • United States: MBA Mortgage Applications, MBA 30-year Mortgage Rate, Pending Homes Sales
  • Canada: Producer Price Index, Raw Materials Prices

Thursday, September the 30th

  • Japan: Retail Sales, Industrial Production, Foreign Bond Investment, Stock Investments by Foreigners
  • China: Non-manufacturing PMI, Caixin Manufacturing PMI
  • Australia: Building Permits, Private Sector Credit
  • Germany: Import Prices, Unemployment Rate Harmonized, harmonized Inflation Rate
  • United Kingdom: Current Account, GDP Growth Rate, Nationwide Housing Prices, Business Investment
  • France: Harmonized Inflation Rate, household Consumption, PPI
  • Spain: Retail Sales
  • Eurozone: Unemployment Rate
  • Italy: Harmonized Inflation Rate
  • United States: Corporate Profits, GDP Growth Rate, Initial Jobless Claims, Jobless Claims 4-week Average, Chicago PMI, NY Fed Treasury Purchases TIPSS 1 to 7.5 years, 4-week and 8-week Bill Auction

Friday, October the 1st

  • Australia: market Manufacturing PMI, Home Sales, Consumer Confidence
  • Japan: Unemployment Rate, Jobs/applications ratio, Tankan Large Manufacturers, BoJ Summary of Opinions, Consumer Confidence
  • Germany: Retail Sales, Markit Manufacturing PMI
  • France: Budget Balance, Markit Manufacturing PMI, New Car Registrations
  • Spain: Markit Manufacturing PMI, New Car Sales
  • Italy: IHS Manufacturing PMI
  • Eurozone: Markit Manufacturing PMI, Core Inflation Rate, Inflation Rate
  • United States: Markit Manufacturing PMI, ISM Manufacturing PMI, Construction Spending, Michigan Current Conditions, Michigan Consumer Expectations and Sentiment, Michigan Inflation Expectations, Michigan 5 year Inflation Expectations, ISM Manufacturing Prices and New Orders, NY Fed Treasury Purchases 2.25 to 4.5 years
Disclaimer

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 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 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.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-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 Capital Markets or its affiliates.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

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 www.home.saxo/en-sg/about-us/awards.

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.