Fixed Income Markets the week ahead

Bonds

Althea Spinozzi

Fixed Income Strategist, Saxo

Summary:  The aftermath of a Biden win is evident: a bear steepener in the U.S., and lower sovereign yields in the European space. The long list of Federal Reserve's speakers this week might give some clues on the central bank's next steps. It will be important to understand whether the Fed will try to control long term yields or if it will let them rise freely even though its inflation target has not been met yet. In Europe, sovereigns will rally led by those countries that will benefit the most from the ECB's dovish policies such as the periphery. Spanish and Portuguese 10-year yields will most likely fall below zero this week. Gilts prices will also be supported as the BoE will need to continue to expand its monetary policies to support the country's exit from the block.


U.S. Treasury yield curve bear steepener, Federal Reserve speakers in focus

How much will the U.S. yield curve steepen? Will, the Federal Reserve, put a cap on 10-year Treasury yields?

We are starting the week full of questions. Throughout last week investors continued to add short bond future positions as they were getting cheaper amid a rally in Treasuries. Short bond positions hit a record high as the market was confident of seeing a Biden win and more scope for reflation. We believe that the 5s30s part of the U.S. yield curve will lead the widening with the 2s10s to follow. Ten-year Treasury yields will test their resistance line at 90bps and will find a new resistance at 1%. Thirty-year yields will find resistance instead at 1.74%.

As the U.S. yield curve steepens, it will be crucial to understand whether the Federal Reserve is considering to put a cap on 10-year yields, especially as breakevens stalled during the past month. This week's economic agenda is full of FED's speakers, which might give a clue on what their intentions are. I find that the more the central bank's speakers, the more anxious the central bank is, thus dovish policies will follow. 

A yield curve steepener will not stop the primary market, which this week is planning to issue around $30bn in blue chips debt and $10bn in high yield debt. Companies are looking to lock in record-low yields as interest rates might rise. We believe that risky assets will continue to be supported as investors are looking for higher-yielding securities to have more buffer amid rising inflation.

The rally in European sovereign will continue, Spanish and Portuguese 10-year government bond yields to go negative

It is crucial to examine the reaction of the European bond market on the back of the U.S. election. On today's opening, we are seeing European sovereigns rallying. The periphery is leading the rally with Greek 10-year government bond yields almost 7bps lower than Friday's close at the time of writing. Spanish and Portuguese 10-year yields are quoting 6 and 4 bps respectively. They will most likely fall below zero this week as a rally in European sovereigns is fueled by a steepening of the U.S. yield curve.

Gilts will also be on the spotlight as the BoE's Governor Bailey will speak four times this week. There is still upside for Gilts even though yields are close to zero because the BoE can only support the British economy as the country leaves the E.U.. Even in this case, the longer duration the most significant upside.

Economic calendar:

Monday, November 9th

  • Japan: Leading Economic Index, Current Account
  • Switzerland: Unemployment Rate
  • Germany: Trade Balance
  • United Kingdom: BoE’s Governor Bailey Speech
  • Eurozone: ECB’s Lagarde speaks

Tuesday, November 10th

  • United Kingdom: BRC Like-For-Like Retail Sales
  • China: Consumer Price Index, Producer Price Index
  • United Kingdom: Claimant Count Change, Average Earnings including Bonus

Wednesday, November 11th

  • New Zealand: RBNZ rate decision and press conference
  •  United Kingdom: NIESR GDP Estimate
  • Eurozone: ECB’s Lagarde speaks at ECB Forum on Central Banking

Thursday, November 12th

  • Australia: Consumer Inflation Expectations
  • Japan: BoJ’s Adachi speech
  • China: Foreign Direct Investment
  • United Kingdom: Industrial Production, Manufacturing Production, GDP numbers, BoE’s Governor Bailey Speech
  • Germany: Harmonized Index of Consumer Prices
  • Eurozone: Economic Bulletin, Industrial Production
  • United States: Consumer Price Index, Jobless Claims, Fed’s Williams speech, Monthly Budget Statement
  • Canada: BoC’s Wilkins speech
  • ECB's Lagarde, BOE's Bailey, Fed's Powell speak at ECB Forum

Friday, November 13th

  • Eurozone: EcoFin Meeting
  • Eurozone: GDP numbers
  • Germany: German Buba President Weidmann speech
  • United States: Fed's Williams Speech, Producer Price Index ex Food & Energy, Michigan Consumer Sentiment
  • United Kingdom: BoE’s Governor Bailey speech
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