Bonds continued to take a hit yesterday on both sides of the Atlantic and curves bear-steepened. The German 10-year yield leaped by some 4bp, though still remains lower compared to where it was around a week ago. The 7bp jump in the US 10-year yield, in turn, brought it to its highest level in around three weeks. Intra-Euro-zone spreads mostly experienced some further narrowing outside the semi-core.
Yields remain exceptionally low and there is more room for long yields to rise and the curve to steepen in the near future, as the ECB delivers its expected easing package tomorrow and US labour market data exhibits positive momentum. Yesterday’s market reaction supports the notion that expectations for the ECB are already high, and it will take bigger surprises for core bonds to rally further from current levels.
Equity markets mostly took modest losses yesterday, while Asian markets are trading mixed this morning. Europe is set to open roughly flat.
Low Euro-zone inflation another call for an ECB easing package
Downside surprises in Euro-zone inflation continued in May, another reminder that the ECB cannot stay on the sidelines any longer without losing credibility. Core inflation fell back to the lowest on record, a further illustration of the subdued price pressures. The numbers only add pressure on the ECB to spice up its easing package further on Thursday. The ECB counted on a rebound in inflation in April, which actually took place, though only in a mild form. However, now we are back at record lows, and it is becoming increasingly difficult for the central bank to dismiss the threat of deflation.
ADP report to support a further rise in yields today
The highlight in today’s calendar will be the ADP employment report at 14:15 CET. The US labour market seems to be enjoying better momentum again, and a positive surprise looks very possible, which should push bond yields further up and support at steeper curve.
Elsewhere in the calendar, final Euro-zone May services PMIs will be out at 10:00 CET, US April trade balance at 14:30 CET, the non-manufacturing ISM at 16:00 CET and the Fed’s Beige Book at 20:00 CET. In addition, the leaders of the G7 countries will meet to discuss imposing additional sanctions on Russia, among other things.
On the issuance front, Germany will re-open its 5-year benchmark for EUR 4bn.
Nordea