Fixed Fixed Fixed

Fixed income market: the week ahead

Bonds
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  We exclude that the recent inversion of the yield curve between 5 and 30 years signals a recession as real yields remain in deeply negative territory. We believe that there is room for 2-year US Treasury yields to continue to rise to 2.85% in the mid-term. However, today's 2-year and 5-year note auctions might briefly pause the bond selloff, as both tenors offer the highest yield in three years. We anticipate the yield curve to continue to bear-flatten with this week’s PCE Index and nonfarm payroll data in focus. In Europe, we expect yields to continue to soar and more parts of the German yield curve to turn positive as the market expects an aggressive ECB to hike rates by 50bps this year. This Friday’s eurozone CPI figures will be in focus.


Dear readers, this will be the last “Fixed income market: the week ahead” before entering maternity leave. Unfortunately, I have to step back during an exciting time for markets. Still, I assure you I will be back full of energy!

Investors bets for an even more aggressive Federal Reserve

US Treasuries’ move has been considerable last week and today. The US yield curve has accelerated its flattening with the 5s30s spread inverting this morning for the first time since 2006. The whole yield curve is shifting higher. However, short-term yields are rising faster than long-term yields. Significant has been the 2-year US Treasury yields move, which broke above their falling decennial trendline. If they continue to soar, they will not find resistance until 2.85%, which coincidentally matches the Fed fund rate forecasted by the dot plot in 2023 and 2024. 

Source: Bloomberg and Saxo Group.

To lead the fast rise in US Treasury yields is the swap market, which now is pricing 200bps additional hikes this year. Moreover, several investment banks adjusted their Fed’s hiking forecasts to reflect the expectations of a more aggressive Fed, which might need to hike rates by 50bps several times this year.

Source: Bloomberg and Saxo Group.

Although investors might quickly pin the flattening and inversion of the yield curve on an upcoming recession, it's essential to put things into context.

First, the long part of the yield curve is not falling but steadily rising, indicating taht the bond market is not concerned about an imminent recession. Ten-year yields are, like two-year yields, on the way to testing their descending decennial trendline and their 200 monthly simple moving average at 2.66%. If they break above this level, they will not find resistance until 3.15%.

Negative real yields are another factor that helps to exclude the possibility of an imminent recession. Indeed, while nominal yields have risen drastically, real yields remain in deeply negative territory, keeping financing conditions extremely easy. However, the more aggressive the Federal Reserve becomes, the faster the rise in real yields, which could cause a sudden tightening of financial conditions affecting weaker corporates.

Yet, we believe that the US economy remains strong at the moment, enabling the central banks to implement tighter monetary policies. In the second half of the year, we might better know whether the economy is facing the risk of a recession.

Source: Bloomberg and Saxo Group.

Today’s 2-year and 5-year US Treasury auctions will be in focus, as ugly-tailing auctions would suggest that the market expects the Federal Reserve to grow even more aggressive. However, the recent bond selloff will allow investors to buy into the highest yields in three years. Therefore, high participation at today's Treasury auctions is more probable, even if we believe there is room for two-year yields to continue to rise.

This week's Federal Reserve speakers, Thursday's February figures on personal income and spending, and Friday's nonfarm payrolls might exacerbate or slow down the rise in yields. If economic data show that inflation continues to rise while the unemployment rate falls, it could build the case for more aggressive monetary policies.

European sovereign yields

European investors will look out for Friday’s eurozone CPI release, which is expected to hit 6.7% in March following a 5.8% reading in February. In the meantime, investors understand that the ECB will unlikely remain accommodative to avoid the same fate of the BOJ. Indeed, by accentuating monetary policies' divergence with the Federal Reserve, the Japanese Yen plunges, welcoming even more inflation.

So far, the market is pricing 50bps ECB rate hikes by the end of the year. Consequently, European sovereign yields continue to rise, with 2-year German yields at -0.14%, rising to 0%, which they didn’t break since 2014.

Economic calendar

Monday, March the 28th

  • United States: Goods Trade Balance (Feb) Prel, Wholesale Inventories (Feb) Prel, 3-month, 6-month, 2-year, and 5-year Note auction

Tuesday, March the 29th

  • Japan: Jobs / Applicants Ratio (Feb), Unemployment Rate (Feb), BoJ Summary of Opinions
  • Australia: Retail Sales (Feb)
  • Germany: Gfk Consumer Confidence Survey (Apr)
  • United Kingdom: Consumer Credit (Feb), M4 Money Supply (Feb), Mortgage Approval (Feb), BoE Quarterly Bulletin
  • United States: Redbook Index (Jan), S&P/Case Shiller Home Price Indices (Jan), 7-year Note Auction

Wednesday, March the 30th

  • New Zealand: Building Permits (Feb), ANZ Activity Outlook (Mar), ANZ Business Confidence (Mar)
  • Japan: Large Retailer Sales (Feb), Retail Trade (Feb)
  • Germany: Import Prices (Feb)
  • Spain: Consumer Price Index (Mar) Prel, HICP (Mar) Prel
  • Italy: Industrial Sales (Jan), Producer Price Index (Mar), 10-year Bond Auction
  • Switzerland:  Zew Survey Expectations (Mar), SNB Quarterly Bulletin (Q1)
  • United Kingdom: BOE’s Broadbent speech
  • Eurozone: Business Climate (Mar), Consumer Confidence (Mar), Economic Sentiment Indicator (Mar)
  • Germany: Consumer Price Index (Mar) prel, Harmonized Index of Consumer Prices (Mar) Prel
  • United States: ADP Employment Change (Mar), Core Personal Consumption Expenditures (Q4), Gross Domestic Product Annualized (Q4), Personal Consumption Expenditures Prices (Q4)

Thursday, March the 31st

  • Japan: Industrial Production (Feb) Prel
  • Australia: Building Permits (Feb), Private Sector Credit (Feb)
  • China: NBS Manufacturing PMI (Mar)
  • United Kingdom: Gross Domestic Product (Q4), Nationwide Housing Prices (Mar)
  • Germany: Retail Sales (Feb), Unemployment Rate (Mar)
  • Switzerland: Real Retail Sales (Feb)
  • France: Consumer Price Index (Mar) Prel, Consumer Spending (Feb), Producer Prices (Feb)
  • United States: Core Personal Consumption Expenditures (Feb), Initial Jobless Claims, Personal Income (Feb), Personal Spending (Feb), Fed’s William Speech, Chicago Purchasing Managers’ Index (Mar
  • Canada: Gross Domestic Product (Jan)

Friday, April the 1st

  • New Zealand: ANZ – Roy Morgan Consumer Confidence (Mar)
  • Japan: Tankan Large All Industry Capex (Q1)
  • China: Caixin Manufacturing PMI (Mar)
  • Spain: Markit Manufacturing PMI (Mar)
  • Italy: Markit Manufacturing PMI (Mar)
  • France: Markit Manufacturing PMI (Mar)
  • Germany: Markit Manufacturing PMI (Mar)
  • Eurozone: Markit Manufacturing PMI (Mar), HICP (Mar) Prel
  • United Kingdom: Markit Manufacturing PMI (Mar)
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.