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German 10-year yields declined -4 bps over the past week to re-test the -.50% level for the second time this month. Meanwhile, 30-year yields are back into negative territory, with the entire German curve now inverted. Slowing growth expectations, Covid 19 delta variant spread concerns, and geopolitical safe haven buying triggered by the crisis in Afghanistan have combined to move global financial markets into a more cautionary stance. The fall in nominal yields was led by declines in real yields, as per inflation-linkers market pricing. Real yields in Germany are back near record lows. For now, we expect continued technical and psychological downside resistance at -.50% in nominal yields, and inside of that at -.62%, and then again at last year’s secular lows at .71%. Upside support is seen near -.40% and again at -.30%, in defense of the 2021 highs near -.08%. From here, German 10-year yields are expected to have more upside than downside, but anything close to 0% is not likely a 2021 story.

10-year IG spreads in EUR inched out to 91 bps, holding however the prevailing range, while 10-year high yield widened +4 bps to 304 bps as a continuation of the recent uptrend in lower-graded spreads. The DAX equity index is testing upside resistance in the 15800-16000 area, with current levels near the middle of that band. As in the US, we are seeing some small-s caution on the part of European stock market investors, but not the extent portrayed by the fallback in government bond yields.

The economic calendar out of Europe this week is highlighted by UK inflation data & EA final HICP inflation on Wednesday, UK consumer confidence on Thursday, and UK retail sales & German PPI on Friday. UK employment data Tuesday came out on the strong side of consensus expectations. Government supply in Europe this week is limited to German 2s on Tuesday, and French 3s & 5s on Thursday.  

US benchmark government yields fell sharply over the past week, led by the belly of the curve. 10-year yields came off a full -12 bps to current levels near 1.23%, of which -4 bps was attributable to a decline in real yields and -8 bps from retreating inflation breakevens, as per TIPS market pricing. Markets have much to focus on apart from geopolitical events overseas, including Congressional budgetary talks and the Fed’s annual Jackson Hole symposium.

In the US corporate credit space, the 10-year investment grade index edged out to 146 bps, the highest level in several weeks. The lower-graded credit spectrum underperformed, as evidenced by a +12 basis point widening in BB to 247 bps. While Fed-tapering is pretty much baked into market expectations, the strength of corporate earnings and cash flow generation, coupled with improving balance sheets and the trend towards more ratings upgrades than downgrades is helping the corporate credit space hold in, at least for now. We remain sellers of credit on strength on the basis of a deteriorating risk return trade-off profile.

On the economic events side, the highlight for the week in the US is the release of the July FOMC minutes on Wednesday. Investors will be looking in the weeds of the minutes for …The economic calendar is on the light side this week, featuring only retail sales & industrial production/capacity utilization on Tuesday, housing starts & building permits on Wednesday, and Philly Fed on Thursday. Government supply is limited to 20s, and 30-year TIPS with the announcement for next week’s 2s, 5s, 7s and 2-year FRNs out as well this Thursday.  Fed Chairperson Powel speaks on Tuesday.