Fri, Oct 22, 2021 @ 00:35 GMT
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Global Core Bonds Lost Significant Ground Yesterday


Global core bonds lost significant ground yesterday with German Bunds underperforming US Treasuries. The down leg started on Tuesday evening following rumours that next week’s ECB meeting is a “live” one. Comments by several ECB governors, including chief economist Praet, nurtured expectations further yesterday morning. Risks increase that the ECB will effectively announce a new forward guidance for APP already next week instead of issuing the “traditional” preannouncement first. More specifically, we expect APP to be tapered out by €10/bn month in Q4 2018. German yields rose by 5.1 bps (2-yr) to 9.6 bps (10-yr) on a daily basis. Changes on the US curve varied between +2.4 bps (2-yr) and +4.4 bps (10-yr). 10-yr yield spread changes vs Germany closed nearly unchanged with Italy underperforming (+5 bps). The new government is expected to ruffle quite some European feathers soon and the ECB’s normalization process spells double trouble. A short squeeze propelled the euro higher yesterday. EUR/USD moved from the low 1.17 to the high 1.17 area, fending off several other factors working in the opposite direction (Italy, strong US eco data, approaching Fed meeting). EUR/GBP followed the move higher in EUR/USD with the pair moving from 0.8740 towards 0.8780.

Most Asian stock markets trade positive overnight, in line with WS’s performance. Chinese bourses underperform (slight losses). Other risk indicators, the US Note future and USD/JPY, send a different signal, suggesting a more neutral opening for the Bund. Today’s eco calendar remains rather dull with EMU Q1 GDP details and US weekly jobless claims. The latter are expected to continue to hover near all-time highs. Overall, we expect next week’s ECB and Fed policy meetings to dominate trading. The former could make the next move in its normalization process while the latter could step up the tightening cycle. Both developments play in the disadvantage of core bonds. The German 10-yr yield is closing in on 0.5% resistance while the US 10-yr yield is bound for >3% levels. We hold our negative bias for core bonds. We think peripheral bond markets will remain under pressure. A normalization of credit premiums was long overdue in these stretched markets. The ECB and Fed could keep EUR/USD in check (ST) within the 1.1540-1.1830 trading range. Sterling remains locked in the tight 0.87-0.88 corridor.

News Headlines

French President Emmanuel Macron has stated that he will not sign a joint statement at the G7 summit in Quebec of 8-9 June, unless progress is made on tariffs, the Iran nuclear deal and Paris climate accord. With his statements he joins German Chancellor Angela Merkel to challenge Trump on a number of current affairs at the summit later this week.

The Polish MPC has announced that it will keep borrowing costs unchanged. Governor Glapinski announced they will keep the benchmark at a record-low 1.5% and will ‘most probably’ maintain this level until the end of 2019. This is in contrast with Czech Republic and Romania, where monetary policy was tightened earlier this year.

Higher US yields and a stronger USD accelerate the sell-off in emerging markets currencies ahead of next week’s FED meeting, with the Brazilian Réal suffering the biggest loss. Domestic political issues (petrol strike) amplify the sell-off. Turkish Lire remains under pressure too. Turkish Central Bank meets today. Will they hike policy rates, like India did yesterday, to abate the pressure?

KBC Bank
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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