The major government bond markets continue their recent rally as the Fed, ECB, and BOE all pushed back on what had been sooner-rather-later rate hike expectations. Interestingly, mid- and longer-term yields are seen lower even with the stronger US jobs report helping propel equity prices to new highs. Inflation expectations remain elevated with breakevens and 5y/5y forwards still trending higher, but real yields tied more to the growth side of the equation appear to be discounting something more sanguine in terms of the economy next year and beyond.
German government yields fell materially this past week, bull-flattening the curve. 10-year yields fell by a full -12 bps to .28%, led by a -25 basis point plunge in real yields. 10-year inflation breakevens moved higher by approximately +12 bps, offsetting about half the increase in reals, as per linker-market pricing. The 2-10s curve flattened by -4 bps to 46 bps. A move back into positive ground for German 10s before year-end now looks increasingly less likely, but remains our call for sometime in 2022. In credit, 10-year investment grade spreads held steady near 96 basis points, while high yield spreads snapped back inside the 300 basis point level, all the way to 292 bps on a -39 basis point decline. The DAX stock market index rallied another +133 points to the current 16090 level, clearing out what had been for some time strong upside resistance in the 15800-16000 area.
The economic calendar in Europe this week started off with Tuesday’s much stronger-than-expected German ZEW sentiment data. The balance of the week features the final German HICP inflation revision for October on Wednesday, preliminary UK Q3 GDP growth and manufacturing/industrial production on Thursday, plus a number of other individual country inflation revisions. In addition, the ECB releases its latest Economic Bulletin and Macroeconomic Projections on Thursday. In terms of government supply, we have German 2s on Tuesday, German 10s on Wednesday, and Italian 3s, 7s, 15s & 30s on Thursday. There is no shortage of ECB speakers, with Panetta, Lane, Balz, Lagarde, Enria, McCaul, Schnabel, Elderson all scheduled.
US benchmark yields continued to move lower this past week, led by the back end of the curve, as market forward growth expectations decouple from the more optimistic underpinnings of the stock market in its latest march to new highs. 10-year nominal yields fell back inside the 1.50% level to current levels near 1.47% on a week-over-week decline of -8 basis points. As per TIPS market pricing, real yields led the charge lower, down a full -12 bps on the week, only partially offset by a +4 bps increase in inflation breakevens. The 2-10s curve declined to 105 basis points on the bull-flattening market move. Technically, we have downside resistance in nominal 10s at 1.45%, and thereafter at the recent breakout point in the high 1.30s, against strong upside yield support in the mid 1.60s. The 2021 interim highs near 1.75% look increasingly less vulnerable at this stage, at least through the balance of the calendar year. Any talk of 2.00% yields and higher are now seen as part of a 2022 storyline. In credit, 10-year investment grade spreads held steady near 144 bps, just back of decent upside resistance in the mid 140s. No material break to the upside is expected any time soon, given that eventual tapering is already pretty much priced into the market.
The highlight with respect to this week’s economic calendar in the US is Wednesday’s CPI report for October, as investors brace for consensus calls of +.4% m/m and +4.3% y/y on core, both readings up from the previous month. PPI on Tuesday, and JOLTs job openings and Michigan Sentiment on Friday are also scheduled for the Veterans Day-abbreviated week. On the government supply front, we have $56 billion in 3s for sale on Monday, $39 bln in 10s on Tuesday, and $25 bln in 30s on Wednesday. In a busy week of Fedspeak, we hear from Powell again on Tuesday, voters Daly on Tuesday and Williams on Friday, as well as from non-voter Bullard and regional President Kashkari on Tuesday.
