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Core Bonds Fell Off a Cliff


What a way to start the week. Core bonds fell off a cliff with the long end again underperforming. The move was natural, not driven by any particular event and that makes it so telling. Some technical breaks did reinforce it though. The German 10y yield surpassed the previous cycle high at 2.77% and temporarily moved above 2.8% for the first time since 2011. Its real yield component broke out from a yield bullish triangle to close at the highest level since 2013. The 30-y variant (+10.5 bps) arrived just shy of the 3% symbolic barrier. US yield changes varied between 1.4 bps (2-y) and 12.7 bps (30-y). The 10-y yield added 10 bps, bringing it above 4.5% – a level last seen in 2007. As the front-end more or less stabilized, yesterday’s curve move add to the evidence of markets at long last coming to terms with the higher for longer era. Equities felt the heat. European indices lost about 1% with the EuroStoxx50 closing below the broad 4200 support level after multiple tests earlier this year. US indices slipped at the open but a recovery later on prevented the likes of the S&P500 (+0.4%) of closing below the neckline of a double top formation. The dollar flourished. EUR/USD finally caved and gave away 1.0635 support (May low). 1.0611 (38.2% retracement on the Sep 2022 – July 2023 rally) followed soon. The pair eventually closed sub 1.06 for the first time since March this year. DXY tested the 106 figure, matching levels last seen in November 2022. USD/JPY rose beyond recent highs, ending the day at 148.88 in another step towards the multidecade closing high of 150.15 (Oct 2022). EUR/USD’s decline filtered through in EUR/GBP. The duo dived from an intraday high around 0.87 to 0.8675. But the pound was no match for the dollar. GBP/USD extended a losing streak to 1.2211. Today’s economic calendar contains US consumer confidence (Conference Board). We don’t think it’ll be of major importance for trading and in any case it shouldn’t interrupt the ongoing core bond trend, even as it possibly shifts into lower gear after yesterday’s violent moves. Markets still have some repositioning to do. The risk-off it creates on equity markets should keep the dollar in the driver’s seat. The equity sell-off at some point will dampen the core bond yield rally through safe haven flows but we probably haven’t reached that tipping point just yet. USD is enjoying another healthy bid in Asian dealings this morning. EUR/USD is moving south slowly but steadily within the downward trading channel. Critical support kicks in at 1.0484/1.0516.

News and Views

Rating agency Moody’s in a statement warned that a US government shutdown could be a negative for the country’s credit rating. Moody’s is the last of the major rating agencies to rate the US with a AAA rating. Fitch and S&P have a AA+ rating. Moody’s assesses that the actual economic impact of a potential shutdown could be relatively limited if the disruption is short. Government debt services payments will not be impacted. However, a shutdown would underscore the weakness of the US institutional and governance strength relative to other AAA-rated sovereigns. It would also be an indication of the significant constraints that intensifying political polarization is putting on US fiscal policy making, the rating agencies says. Still, the shutdown is seen as having an direct impact on government spending and will also impact consumption and spending of federal workers and contractors.

Data from the Hungarian statistical office yesterday showed that in July 2023 full-time employees’ average gross earnings were HUF559 100 and average net earnings with tax benefits reached HUF 385 600. Average gross earnings and average net earnings increased by 15.2% and 15.1%, respectively, while real earnings decreased by 2.0%, compared with a year earlier. The rise in earnings was slightly softer than expected and was a last data input for the policy decision of the Hungarian National Bank today. End last week, data of the Ministry of Finance also showed that the budget deficit at the end of August already stood at HUF 3.3 trillion, close to the full year target. The higher than expected deficit was for an important part was due to VAT proceeds staying substantially below the government’s estimate despite high inflation as retail sales in the January-July period were about 10% lower compared to the same period last year. The forint yesterday weakened to the EUR/HUF 390 area, but this move was mainly driven by a global risk-off context and higher real yields in core markets.

KBC Bank
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