Core Bonds Inch Lower


There was a bit more hesitation compared to when delta emerged, but it seems that omicron for now simply provided a buying opportunity. Yesterday’s optimism arose from early hospital data in South Africa and US medical advisor Fauci on Sunday being hopeful that omicron is only causing mild symptoms. The PBOC during the day cut the RRR with 50 bps, freeing up liquidity to support the economy. It helped shape the constructive risk setting too. Bargain hunters scooped up heavy-hit stocks, led by travel and airlines. Equities jumped from <1% to >2% in Europe and the US. Core bonds fell with USTs hugely underperforming the Bund. US yields added 4.3 bps (2y) to 9.9 bps (20y). The 10y clawed its way back above recently broken neckline support of 1.41%. Most of the US action happened after the European close. German yields thus missed out on the yield rally, rising a mere 1.7 bps at the short end. Being delivered after-market, ECB’s Holzzman’s interesting speech also didn’t affect European bonds (yet). He said Interest rates could be increased while net purchases are still in progress – if I’m not mistaken, the Swedes did something like that in early 2020 and, contrary to what some feared, capital markets weren’t disrupted. It’s the first call from within the Governing Council to abolish the long-standing sequence between asset purchases and interest rate hikes. Holzmann thinks it’s very unlikely for inflation to be below 2% in 2022 as a whole and expects supply bottlenecks to persist. In such circumstances he clearly likes to have the option to raise raising rates even if bonds are still being bought. Turning to FX markets, the Japanese yen and Swiss franc reversed Friday’s gains. Searing US yields also gave the USD an edge despite the risk-on. The trade-weighted DXY went from 96.11 to 96.33. EUR/USD drifted south of 1.13. Sterling strengthened from EUR/GBP 0.856 to 0.8507. BoE’s Broadbent in a balanced speech declined to answer whether a rate hike is needed in December. Omicron needs time to be assessed, part of inflation is going to subside before any rate increase had time to take effect but tight labour markets pose upside risks to wage costs. Apart from second-tier European data (ZEW), the economic calendar eyes meagre, putting sentiment at the driver’s seat. A very upbeat Asian session inspired by strong Chinese trade data and yesterday’s EU/US performance is set to spill over back into European dealings again. Core bonds inch lower. German Bunds may underperform after missing out on the US and Holzmann’s speech yesterday. First resistance in the US 10y stands at 1.48%. -0.347% is looked at in the German 10y. The combination with risk-on may help an ailing euro though first meaningful resistance in EUR/USD is still a long way off (1.1422).

News headlines

The Australian central bank (RBA) kept its policy rate unchanged this morning at 0.1%. The new policy statement dropped several small references arguing to keep monetary policy as long as possible very accommodative. Next to that, it even turned somewhat more upbeat. The emergence of the Omicron strain is a new source of uncertainty, but it is not expected to derail the recovery. A further pick-up in wages growth is expected as the labour market tightens. The Board will consider the bond purchase program at the February 2022 meeting, with a sudden stop rather than tapering probably amongst the possibilities. The RBA will not increase the cash rate until actual inflation is sustainably within the 2%-3% target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time and the Board is prepared to be patient. AUD/USD tested the 0.70 big figure yesterday morning, but is currently back up to 0.7080.

Hungarian deputy MNB-governor Virag said this morning that the central bank will front-load as much of the interest rate hikes as necessary to defeat inflation, “no matter how long the road ahead of us is”. He referred to having the fastest real rate increase in CEE, which would surely help prop up the ailing currency. He also suggested a faster exit from other stimulus measures. The forint is already slightly stronger in Asian trading with EUR/HUF falling from 366 to 365. Follow-up action is likely once European dealings get going.

KBC Bank
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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