Within the nominal yield rollercoaster, not everything is back to 2-weeks ago pre-US jobs data
Last week’s fixed income market dynamics represented a (occasionally) sharp reversion in nominal yields back down to the levels seen early in July, seemingly correcting the bearishness observed in bonds all across. This should not yet be read as a sign that we are still immersed in a context where yields (and asset valuations in general) just test the upper and lower reference of the ranges that have been in force over the past few months. On the contrary, certain elements suggest to us that the context is gradually changing towards a tighter rate levels context:
- Despite the dovish reaction to the softer-than-expected inflation data in the US, we perceive some resistance in the monetary curves (both the USD and EUR ones) to the adoption of dovish inversion bias observed some months ago.
- Of the c.15bp of downward correction seen in nominal yields from their c.2.65% peak, c.12bp responded to the inflation expectations comment and “only” 4/5bp to real rates, which still stand above 0.25%, the 90 percentile of the last 10 years range.
- Curve wise, we continue to consider the slopes in the long and ultra long tenors as a fair “warning signal” about what is the actual perception of “dovishness” held in the market; if we look at the recent movements, the “dis-inversion in the ultra-long tenors remains ongoing
Looking ahead, regarding rates performance, this is the kind of profile we should brace for when looking at the rest of the summer: swallow markets with limited incentives to take strong directional positions will very likely fuel episodes of eventual spikes of volatility in curve direction/slopes as a response to data flow. This may exacerbate movements in both directions but, as a base case, so long as we still see Bund yields consolidating above the 2.50% threshold, we still see yields directionally more biased to the upside than to the downside
Periphery outlook.
- Last week showed a general decrease in both yields and peripheral spreads, triggered by the US CPI data released on Wednesday last week. The performance of peripherals was largely in line with the typical Beta that has characterised their performance in recent months. In terms of slopes, the main trend in the 2Y-10Y area was again a generalised flattening, more pronounced in the 2Y-5Y sector, while the 10Y-15Y area of peripherals curves steepened (mainly due to the supply factor).
- Regarding Italy, it was the clear winner last week. The strongest performance was in the 10Y tenor. From the supply perspective, last week the Italian auctions showed strong results, in particular on the new 3Y BTP September 2026. This week, nothing is scheduled. Regarding the announcements of the next week's auction cycle, we expect lighter auctions in terms of the amount offered (in the range of EUR11.5-12.0bn) without any new benchmark.
- Regarding Spain, last week showed a spread tightening vs. Bund in the 2Y-10Y tenors and a slight widening in the >15Y tenors. The SPGBs now look slightly cheaper vs. BTPs, in particular in the 10Y tenor (spread at c.64bp, the minimum level since March 2022). As expected, Moody’s didn’t change Spain’s sovereign rating (Baa1) and Outlook (Stable). On Sunday, the general elections will take place with PP leading the polls.
- Looking at Portugal, last week showed a mixed picture in terms of spread vs. Bund dynamic: the average spread performance of PGBs was largely flat. Waiting for the Monthly Bulletin in which it will be possible to quantify the first effect on June retail issuance activity after the Treasury modified some of the conditions pertaining to the new series of retail products.
Weekly supply. On the bills market Total issuance will be c.EUR15.9bn in gross terms and c.EUR4.0bn in net terms (redemptions in Germany and Portugal). In bonds, core markets will see Germany and France active. Among peripherals, Greece and Spain will also tap the market on Wednesday and Thursday respectively. Total issuance will be c.EUR28.3bn in gross terms but negative of c.EUR10.8bn in net terms