Fixed income market: the week ahead

Ahead of the ECB meeting on Thursday, it will be key to watch out for bidding metrics during the 7-year Bund auction tomorrow and the 30-year Bund sales on Wednesday. Lately, Bund auctions have not drawn enough interest. The German finance agency placed only roughly €1.7 billion out of the target €2.5 billion at the latest 15-year Bund auction. It's crucial to see whether investors will add duration now that 30-year Bunds are offering a yield of 0.35%, one of the highest yields they provide in two years. If demand is weak, it implies that the long part of the German yield curve is not fairly priced, which may provoke a further steepening ahead of the ECB meeting.

Italy is also issuing 3- and 7-year BTPS ahead of the monetary policy meeting. Therefore, we expect demand to be solid as BTPS continue offering the highest yield in the euro area.

It’s important not to forget that European sovereigns continue to be tightly correlated with US Treasuries. Therefore, if we see yields rising in the US, the dovish message of the ECB might be useless to keep yields in check.

CPI figures might add to tapering fears.

Friday’s jobs miss highlights that widespread shortages might soon weigh on the recovery. Since the global financial crisis, central banks' default answer to such data would have been more monetary stimulus. That's the only reason why US Treasury yields fell on Friday afternoon, with 10-year yields closing at 1.55%, the lowest since April. Yet, this time around, things might be different. Unit labor costs have risen 1.7%, although forecasts were showing a fall of -0.4%. It raises questions on whether the rise in inflation we are witnessing is transitory or not.

Yesterday’s Janet Yellen comments regarding the beneficial nature of higher interest rates for both the Federal Reserve and society raises even more doubts about the Fed's dovish message. Yellen, the “deficit dove”, might be preparing the ground for tapering talks ahead, as if inflation continues to strengthen.

This week’s core CPI is expected to show a rise of 3.4% YoY, the highest since 1993. However, the most critical data will be the monthly figure which is expected to come at 0.40%, well below the prior reading of 0.9%. If we see this number exceeding expectations, the bond market might throw a tantrum. Indeed, while yearly CPI readings are transitory, the monthly ones might not be, making early tapering talks more likely.

Ahead of the CPI figures, bond investors will need to monitor tomorrow 3-year and Wednesday's 10-year bond auction, which can give clues about market positioning ahead of the CPI readings and next week's Federal Reserve monetary policy meeting. On Thursday, the US Treasury is set to sell 30-year bonds following the CPI numbers.

We remain of the opinion that at next week's monetary policy meeting, the Fed will stick to its Average Inflation Targeting framework. However, it will need to revisit its stance during summer as inflationary pressure peaks. We expect to receive tapering signals as soon as Jackson Hole, while tapering may happen as soon as September.

Within this environment, 10-year yields have the potential to trade rangebound or even fall in the short term if the Fed continues with its dovish signal. Yet, the long term trend is for them to move higher and try the pivotal 2% level during summer.

This week's monetary policy decision from the Bank of Canada on Wednesday and Russia on Friday can also weigh on US Treasury yields. If their policies exceed expectations regarding tightening, tapering fears will rise in the US, too.

Economic Calendar

Monday, the 7^th of June

• China: Trade Balance
• Japan: Leading Economic Index
• Australia: RBA’s Debelle Speech
• Switzerland: Unemployment Rate, Foreign Currency Reserves
• Eurozone: Sentix Investor Confidence
• United States: 3- and 6-month Bill Auction
• United Kingdom: BRC Like-For-Like Retail Sales

Tuesday, the 8^th of June

• Japan: Current Account, Gross Domestic Product, Trade Balance
• Australia: HIA New Home Sales
• Germany: Industrial Production, ZEW Survey – Current Situation and Economic sentiment, 7-year Bond sales
• United Kingdom: DMO to sell 2026 and 2071 Gilts
• France: Trade Balance
• Italy: Retail Sales
• Eurozone: ZEW Survey – Economic Sentiment, Gross Domestic Product
• United States: Goods and Services Trade Balance, 3-year Note Auction, JOLTS Job Opening
• Canada: International Merchandise Trade

Wednesday, the 9^th of June

• Australia: RBA’s Kent Speech, Westpac Consumer Confidence
• China: Consumer Price Index, Producer Price Index
• United Kingdom: DMO to sell 2031 Gilts
• Germany: Trade Balance, Current Account, 30-year Bond sales
• United States: MBA Mortgage Applications, Wholesales Inventories, 10-year Bond Auction
• Canada: BOC Interest Rate Decision and Rate Statement

Thursday, the 10^th of June

• Japan: Foreign Bond Investment, Foreign Investment in Japan Stocks, Producer Price Index
• Australia: Consumer Inflation Expectations
• China: Foreign Direct Investment, M2 Money Supply
• Eurozone: ECB Interest Rate Decision and Deposit Rate Decision, ECB Monetary Policy Statement and Press Conference
• Italy: 3-year and 7-year Bond Auction
• United Kingdom: BoE’s Haldane Speech
• United States: Consumer Price Index, Initial Jobless Claims 4-week average, Continuing Jobless Claims, 30-year Bond Auction, Monthly Budget Statement
• Canada: BoC’s Lane Speech

Friday, the 11^th of June

• Eurozone: G7 Meeting
• United Kingdom: Trade Balance non -EU, Manufacturing Production, Gross Domestic Product, NIESR GDP Estimate (3M)
• United States: Michigan Consumer Sentiment Index