Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
The ECB will not abide by markets
Althea Spinozzi
Head of Fixed Income Strategy
Summary: We believe that the market is ahead of itself regarding ECB's interest rate hikes expectations. The ECB will most likely keep open the possibility to become less accommodative if inflation remains sustained. Still, it will discard interest rate hikes until 2023. It means short-term rates might tumble, forcing the EUR lower. Don't be fooled: positive German yields will soon be a reality across the yield curve as the central banks prepare to normalize monetary policy. Italian government bonds' honeymoon is over as market volatility remains sustained. We expect the BTPS-Bund spread to widen before resuming its decennial tightening trend.
This week, the market has advanced interest rate expectations in Europe. Money markets began to price 9bps of ECB tightening for July, sending shockwaves in the European sovereign space. Two-year German yields rose above the ECB deposit rate of -0.5% for the first time since 2015, in a sign that tomorrow Lagarde will lean against a rate hike in 2022. To foster such suspicions were the higher-than-expected inflation numbers released this week which showed a monthly pick up of 0.9% in Germany and Eurozone inflation rising to 5.1% YoY.
The ECB finds itself in a challenging position ahead of tomorrow's monetary policy meeting. On one side, it will want to retain the option open to fighting inflation. On the other hand, it needs to avoid igniting a deeper selloff in rates markets.
Therefore, the central bank is trapped. With the Federal Reserve and the Bank of England advancing with aggressive monetary policies this year, the euro area's yields will also rise. Additionally, the PEPP program is ending in March, pulling even more economic support and applying upward pressure to rates. That would cause a natural tightening of financing conditions in the euro area, which the ECB would want to monitor.
Therefore we’ll probably see Lagarde pushing back against a rate hike this year, disappointing on the market's hawkish expectations. We could witness a contained rally in European sovereigns, which could tumble the EUR.
Don’t be mistaken: ten-year Bund yields might have become a memory already this week. Any hawkish or dovish shift of the ECB will be mostly felt by the front part of the yield curve. However, it's undeniable that the whole German yield curve willsettle above 0% as the ECB gets ready to normalize its monetary policy.
Italian government bonds’ honeymoon is over.
The celebrations for the re-election of President Mattarella were short-lived. After a modest tightening of the BTP-Bund spread on Monday, the spread resumed rising yesterday. It shows that the performance of Italian government bonds does not depend entirely on the national political situation. At this moment, they are more vulnerable to central banks’ monetary policies.
Because BTPS carry a higher beta than peers, Italian sovereigns will suffer the most as volatility in rates markets increases. Therefore, we remain constructive on our view that the BTPS-Bund spread will widen to 160bps before resuming its tightening decennial trend.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)