Fixed income market: the week ahead

US Treasuries: debt ceiling, GDP and PCE figures in focus.

Ten-year Treasury yields have broken above 1.4% and sustained trading above this level for the first time since June. They happen to be in a fast area which seems to be leading them quickly above 1.5%. Things are moving fast today, with yields rising across the yield curve. Ten-year yields broke briefly above 1.5% following US durable goods orders data, exceeding expectations by more than double. Five-year yields are flirting with their 1% resistance, a level that they haven't crossed since March 2020. If they break above this level, they enter a fast area that could take them quickly to 1.2%. Lastly, 30-year yields are testing resistance at 2%. Yet, yields have the potential to slow down their rise as economic data might confirm a deceleration in growth on Thursday, putting a cap on yields.

As we enter October, a topic becoming more and more relevant to US Treasuries is the debt ceiling. Congress is struggling to find bipartisan support to raise the debt ceiling. The US Treasury secretary, Janet Yellen, warned that if an agreement is not reached, the country will run the risk of defaulting on its own debt by the end of October. We exclude the government will accept a default, forcing Democrats to extend the debt ceiling under their partisan multi-trillion-dollar tax and spending plan. However, the later such an extension arrives, the more profound implications for the bond market. To refinance existing maturing debt, the US Treasury needs to sell large volumes of T-Bills in a short period, provoking what can be called Quantitative Tightening (QT). Despite the RRP facility continues to hit new records signaling that liquidity in the money market is unusually high, a sudden large increase of T-Bill issuance can be difficult to digest even for a yield-hungry money market, leading to a bear flattening of the yield curve.

However, the long part of the US yield curve is more likely to be volatile than the front end this week as the market will focus on inflation and growth. On Thursday, GDP figures might show that the economic rebound has been slower than expected at the beginning of the year despite four consecutive quarters of expansion. Additionally, the Evergrande fallout poses a threat to global growth. Thus, GPD data might underpin US Treasury yields ahead of Friday' PCE deflator. Consensus expects prices to have stabilized in August and the PCE Deflator to rise slower than July, keeping the year-over-year figure flat at 4.2%. Investors will be looking at signals of whether inflation might be transitory or not, especially in light of recurrent supply chain disruptions as well as high energy prices. A strong PCE number might lead the Federal Reserve to a more aggressive tapering, especially if there are signs of persistent inflation. At that point, the market will need to consider earlier interest rate hikes leading to a bear steepening of the yield curve.

Bond auctions are also pivotal this week, with the US Treasury issuing 2-year and 5-year notes today and 7-year notes tomorrow. Investors will closely watch tomorrow's 7-year auction as in February, it sparked a widespread selloff due to lack of demand. We expect demand to be solid; however, it's critical to understand whether investors' appetite for US Treasuries is decreasing now that yields are moving higher.

Economic calendar

Monday, September the 27th

• Japan: Leading Economic Index
• Eurozone: Loans to Households, Loans to Companies, M3 Money Supply
• Spain: Producer Price Index
• France: Unemployment Benefit Claims, Jobseekers Total
• United States: Durable Goods Orders, Dallas Manufacturing Index, NY Fed Treasury Purchases 10 to 22.5 years, 2-year and 5-year Note Auction
• Canada: 10-years Bond auction

Tuesday, September the 28th

• Japan: BoJ Monetary Policy Meeting Minutes
• Australia Retail Sales
• Germany: GfK Consumer Confidence
• United Kingdom: 30-year Treasury Gilt Auction
• United States: Goods Trade Balance, Wholesale Inventories, Redbook, S&P/Case-Shiller Home Prices, House Price Index, CB Consumer Confidence, Richmond Fed Manufacturing Index, NY Fed Treasury Purchases 2.25 to 4.5 years, 7-year Note Auction

Wednesday, September the 29th

• Spain: Harmonized Inflation Rate
• Italy: Producer Price Index
• United Kingdom: BoE Consumer Credit, Mortgage Lending, Mortgage Approvals
• Eurozone: Consumer Confidence, Economic Sentiment, Industrial Sentiment, Service Sentiment, Consumer Inflation Expectations
• Germany: 10-year Bund Auction
• Italy: 5-year and 10-year BTP auction
• Spain: Business Confidence
• United States: MBA Mortgage Applications, MBA 30-year Mortgage Rate, Pending Homes Sales
• Canada: Producer Price Index, Raw Materials Prices

Thursday, September the 30th

• Japan: Retail Sales, Industrial Production, Foreign Bond Investment, Stock Investments by Foreigners
• China: Non-manufacturing PMI, Caixin Manufacturing PMI
• Australia: Building Permits, Private Sector Credit
• Germany: Import Prices, Unemployment Rate Harmonized, harmonized Inflation Rate
• United Kingdom: Current Account, GDP Growth Rate, Nationwide Housing Prices, Business Investment
• France: Harmonized Inflation Rate, household Consumption, PPI
• Spain: Retail Sales
• Eurozone: Unemployment Rate
• Italy: Harmonized Inflation Rate
• United States: Corporate Profits, GDP Growth Rate, Initial Jobless Claims, Jobless Claims 4-week Average, Chicago PMI, NY Fed Treasury Purchases TIPSS 1 to 7.5 years, 4-week and 8-week Bill Auction

Friday, October the 1^st

• Australia: market Manufacturing PMI, Home Sales, Consumer Confidence
• Japan: Unemployment Rate, Jobs/applications ratio, Tankan Large Manufacturers, BoJ Summary of Opinions, Consumer Confidence
• Germany: Retail Sales, Markit Manufacturing PMI
• France: Budget Balance, Markit Manufacturing PMI, New Car Registrations
• Spain: Markit Manufacturing PMI, New Car Sales
• Italy: IHS Manufacturing PMI
• Eurozone: Markit Manufacturing PMI, Core Inflation Rate, Inflation Rate
• United States: Markit Manufacturing PMI, ISM Manufacturing PMI, Construction Spending, Michigan Current Conditions, Michigan Consumer Expectations and Sentiment, Michigan Inflation Expectations, Michigan 5 year Inflation Expectations, ISM Manufacturing Prices and New Orders, NY Fed Treasury Purchases 2.25 to 4.5 years