Fixed income market: the week ahead

To lead the fast rise in US Treasury yields is the swap market, which now is pricing 200bps additional hikes this year. Moreover, several investment banks adjusted their Fed’s hiking forecasts to reflect the expectations of a more aggressive Fed, which might need to hike rates by 50bps several times this year.

Although investors might quickly pin the flattening and inversion of the yield curve on an upcoming recession, it's essential to put things into context.

First, the long part of the yield curve is not falling but steadily rising, indicating taht the bond market is not concerned about an imminent recession. Ten-year yields are, like two-year yields, on the way to testing their descending decennial trendline and their 200 monthly simple moving average at 2.66%. If they break above this level, they will not find resistance until 3.15%.

Negative real yields are another factor that helps to exclude the possibility of an imminent recession. Indeed, while nominal yields have risen drastically, real yields remain in deeply negative territory, keeping financing conditions extremely easy. However, the more aggressive the Federal Reserve becomes, the faster the rise in real yields, which could cause a sudden tightening of financial conditions affecting weaker corporates.

Yet, we believe that the US economy remains strong at the moment, enabling the central banks to implement tighter monetary policies. In the second half of the year, we might better know whether the economy is facing the risk of a recession.

Today’s 2-year and 5-year US Treasury auctions will be in focus, as ugly-tailing auctions would suggest that the market expects the Federal Reserve to grow even more aggressive. However, the recent bond selloff will allow investors to buy into the highest yields in three years. Therefore, high participation at today's Treasury auctions is more probable, even if we believe there is room for two-year yields to continue to rise.

This week's Federal Reserve speakers, Thursday's February figures on personal income and spending, and Friday's nonfarm payrolls might exacerbate or slow down the rise in yields. If economic data show that inflation continues to rise while the unemployment rate falls, it could build the case for more aggressive monetary policies.

European sovereign yields

European investors will look out for Friday’s eurozone CPI release, which is expected to hit 6.7% in March following a 5.8% reading in February. In the meantime, investors understand that the ECB will unlikely remain accommodative to avoid the same fate of the BOJ. Indeed, by accentuating monetary policies' divergence with the Federal Reserve, the Japanese Yen plunges, welcoming even more inflation.

So far, the market is pricing 50bps ECB rate hikes by the end of the year. Consequently, European sovereign yields continue to rise, with 2-year German yields at -0.14%, rising to 0%, which they didn’t break since 2014.

Economic calendar

Monday, March the 28^th

• United States: Goods Trade Balance (Feb) Prel, Wholesale Inventories (Feb) Prel, 3-month, 6-month, 2-year, and 5-year Note auction

Tuesday, March the 29^th

• Japan: Jobs / Applicants Ratio (Feb), Unemployment Rate (Feb), BoJ Summary of Opinions
• Australia: Retail Sales (Feb)
• Germany: Gfk Consumer Confidence Survey (Apr)
• United Kingdom: Consumer Credit (Feb), M4 Money Supply (Feb), Mortgage Approval (Feb), BoE Quarterly Bulletin
• United States: Redbook Index (Jan), S&P/Case Shiller Home Price Indices (Jan), 7-year Note Auction

Wednesday, March the 30^th

• New Zealand: Building Permits (Feb), ANZ Activity Outlook (Mar), ANZ Business Confidence (Mar)
• Japan: Large Retailer Sales (Feb), Retail Trade (Feb)
• Germany: Import Prices (Feb)
• Spain: Consumer Price Index (Mar) Prel, HICP (Mar) Prel
• Italy: Industrial Sales (Jan), Producer Price Index (Mar), 10-year Bond Auction
• Switzerland:  Zew Survey Expectations (Mar), SNB Quarterly Bulletin (Q1)
• United Kingdom: BOE’s Broadbent speech
• Eurozone: Business Climate (Mar), Consumer Confidence (Mar), Economic Sentiment Indicator (Mar)
• Germany: Consumer Price Index (Mar) prel, Harmonized Index of Consumer Prices (Mar) Prel
• United States: ADP Employment Change (Mar), Core Personal Consumption Expenditures (Q4), Gross Domestic Product Annualized (Q4), Personal Consumption Expenditures Prices (Q4)

Thursday, March the 31^st

• Japan: Industrial Production (Feb) Prel
• Australia: Building Permits (Feb), Private Sector Credit (Feb)
• China: NBS Manufacturing PMI (Mar)
• United Kingdom: Gross Domestic Product (Q4), Nationwide Housing Prices (Mar)
• Germany: Retail Sales (Feb), Unemployment Rate (Mar)
• Switzerland: Real Retail Sales (Feb)
• France: Consumer Price Index (Mar) Prel, Consumer Spending (Feb), Producer Prices (Feb)
• United States: Core Personal Consumption Expenditures (Feb), Initial Jobless Claims, Personal Income (Feb), Personal Spending (Feb), Fed’s William Speech, Chicago Purchasing Managers’ Index (Mar
• Canada: Gross Domestic Product (Jan)

Friday, April the 1^st

• New Zealand: ANZ – Roy Morgan Consumer Confidence (Mar)
• Japan: Tankan Large All Industry Capex (Q1)
• China: Caixin Manufacturing PMI (Mar)
• Spain: Markit Manufacturing PMI (Mar)
• Italy: Markit Manufacturing PMI (Mar)
• France: Markit Manufacturing PMI (Mar)
• Germany: Markit Manufacturing PMI (Mar)
• Eurozone: Markit Manufacturing PMI (Mar), HICP (Mar) Prel
• United Kingdom: Markit Manufacturing PMI (Mar)