German yields edged only slightly higher, but US yields climbed some more on the back of some encouraging data releases (e.g. consumer confidence jumping to its highest since late 2007) and booming equities. The German 10-year yield ended the day up by less than a bp, while the US 10-year one ascended by some 3.5bp.
Core bonds are likely to feel some pressure early today on the back of improved risk appetite, but yields are set to fall later in the day on the back of still soft comments by the Fed (see more below).
Narrowing was mainly the name of the game in intra-Euro-area bond markets, but the moves were not that big. Spreads have lacked clear direction lately, implying there is clear resistance to further spread narrowing. That said, even if volatility has increased, spreads should have more narrowing potential. The near-term sentiment should be supported to some extent by the European Commission’s decision not to find any country in serious non-compliance on their budgets.
Equities rallied on both sides of the Atlantic. In Europe, the Stoxx 600 gained by 0.97%, while in the US S&P 500 advanced by 1.19%, leaving the index only 1.7% shy of its record highs. Asian equities are trading broadly higher as well this morning, and European markets are set to open further in the black.
Riksbank goes all the way to zero
The Swedish Riksbank delivered a small surprise yesterday, when it lowered its benchmark rate all the way to zero. Even though the scale of the surprise was small, while Governor Ingves said the Riksbank thought this easing would be enough, the Swedish krona moved to near its weakest against the euro since 2010. The central bank has more tools at its disposal, if needed, including FX interventions, but for now the bank sees little reason for such measures.
The Riksbank’s decision yesterday was another illustration that many central banks, including the ECB, are still looking for more ways to provide easing amidst much muted inflation pressures.
QE to end, near-zero rates not
Amidst the market turbulence a couple of weeks ago, there were some talks of the Fed postponing its final tapering move, but such a decision looks highly unlikely. However, the Fed will be careful not to send any new hawkish signals at this point, especially after the recent market turmoil and the fall in inflation expectations, as there is no chance to explain new language in detail (no press conference). As a result, Treasuries look set to record modest gains after the Fed’s statement, while the curve could flatten a bit. Yet, the fact that the market is already pricing in both a later start and a slower pace of tightening compared to the FOMC median should limit the size of the moves.
In the Euro area, the ECB’s quarterly bank lending will gather a lot of interest at 10:00 CET. In addition, Spanish September retail sales will be released at 9:00 CET, the ECB’s Hansson will speak at 10:00 CET, the ECB will release the results of its 3-month refinancing operation at 11:10 CET and Belgian Q3 GDP numbers will be out at 15:00 CET.
US and German supply
Bond supply will continue today with German and US auctions. Germany will re-open its 10-year benchmark for EUR 4bn, while the US will sell 2-year floating-rate notes for USD 15bn and 5-year notes for USD 35bn.
Nordea