Global bond yields are on the move higher, driven by fears of US Fed rate hikes since last week’s FOMC. Those concerns were further stoked by hawkish, less sanguine on inflation comments by Fed Chairperson Powell in front of his semi-annual Congressional testimony this week. The UK’s BOE has sounded similarly more aggressive in tone of late, and statements from the ECB’s Lagarde speaking at its Central Bank forum could as well add to the narrative, particularly on the move in oil to over $80 and the surge in natural gas prices. The key event drivers of financial markets this week apart from the Powell testimony include the US budgetary talks, centering around infrastructure, reconciliation, and the debt ceiling, and lingering Chinese real estate disturbance.
The German election on Sunday saw a narrow victory of the SDP party over the center-right CDU/CSU coalition and equity investors breathing a sigh of relief in part as the Die Linke’s poor showing effectively shuts out the left-wing party from Coalition discussions. It will take some time before the dust settles with outbound Chancellor Merkel taking on the role of interim caretaker, but the consensus is for a moderate Coalition of the SPD, Greens, and pro-business Free Democrats.
German benchmark yields moved materially higher on a week-over-week basis, lagging however the big up-move in US Treasuries. 10-year Bund yields rose a full +14 bps higher to lead the government curve, against an approximate +20 bps increase in Treasury yields. The increase was primarily due to higher inflation breakevens, up +11 bps on the week against a more modest +3 basis point increase in real yields. Technically, with the move through upside support around -.29% to current levels near -.19% the next technical levels to watch are -.15% and the 2021 highs of -.08%. In credit, IG spreads held steady near 93 bps, holding the prevailing range, while high yield spreads bounced about +8 bps higher to current levels near 268 bps. The DAX equity market remains under pressure, with today’s selloff wiping out the gains of the past week. The retreat from heavy upside resistance in the 15800 to 16000 area over the past month or so has now extended itself to current levels near 15400. The EUR is again back inside the 1.20 level on the rise in Fed rate hike expectations since last week’s FOMC.
The economic calendar in Europe features German Gfk consumer confidence on Tuesday, German import prices & EU sentiment numbers on Wednesday, German unemployment and a UK Q2 GDP revision on Thursday, and German retail sales on Friday. In addition, we have key flash inflation estimates for the EU, Germany, and others in the midweek period, and a number of PMI revisions for the region later in the week. Government supply sees UK 30-year Gilts on Tuesday, German 10s and Italian 5s & 10s on Wednesday. ECB President Lagarde speaks on Tuesday.
US government yields jumped higher this past week, with even shorter dated maturities on the move. 10-year benchmark yields led the charge, up a full +20 basis points on a week-over-week basis. The move in nominals was attributable to fairly evenly balanced increases in real yields and inflation breakevens, as per 10-year TIPS market pricing. After slicing through upside yields support in the high 1.30s, the next logical line of defense is seen in the mid to high 1.50s. We don’t expect yields moving as high as 2.00% before the year is out, with that more of a 2022 scenario, but would not be surprised to see the 2021 highs near 1.80% at least challenged. On the credit front, 10-year investment grade (IG) spreads tightened back inside the 140 basis point level, with the move higher in absolute corporate yields outdistanced by the surge in underlying benchmark government yields. IG spreads now sit near the cycle lows printed in mid June of this year.
The economic calendar in the US kicked off this week with strong durables numbers on Monday. Follow-up releases include wholesale & retail inventories and Conference Board Consumer Confidence on Tuesday, pending home sales on Wednesday, a Q2 GDP revision on Thursday, and personal income & spending, including its PCE deflator component as the Fed’s primary policy gauge of inflation, ISM & Markit manufacturing PMIs, construction spending, and Michigan Sentiment on Friday. In terms of US government supply this week, we already saw $60 bln in 2s & $61 bln in 5s on Tuesday, and a follow-up auction of $62 billion in 7s on Tuesday. From the Fed we heard from voters Evans, Williams and Brainard on Monday, with Evans again, Chairperson Powell, Bowman, Bostic, and non-voter Bostic on Tuesday, Powell and Bostic again on Wednesday, Williams, Bostic, Evans, Bullard and Philly Fed President Harker on Thursday, and Harker again and non-voter Mester on Friday to finish off an enormously busy week of Fedspeak.