Benjamin Schroeder

Sovereign-related and supranational issuers are not just caught up in the reassessment of sovereign risk. If longer rates start drifting higher, credit curves should remain steeper with the sector also facing elevated funding levels. The EU bond market evolves further but faces challenges as key states are under pressure and supply risks loom

Quantitative tightening and a still elevated supply are headwinds for the overall eurozone sovereign bond space. But that does not mean individual countries can’t outperform further while others remain under more pressure. All eyes are on French deficit concerns, while the periphery continues on a positive footing

Bunds have underperformed versus risk-free rates at an accelerated pace amid structural headwinds from supply and the ECB’s quantitative tightening. Further underperformance from the long end looks likely, but there are arguments for some stabilisation as Bunds still occupy a special place in the eurozone bond market

US core CPI continues to show up hot, which pushes against the bullish case for USTs

While we don’t entirely exclude 50bp, the European Central Bank is likely to decide on another 25bp cut. If the communication turns more dovish, then markets may going forward be even keener to price in a lower landing zone on the back of weaker economic data. After a 0.3% MoM US core CPI reading, rates will be carefully watching the PCE numbers next week

The European Central Bank cut by 25bp as widely expected but EUR rates moved higher coming out of the press conference with the belly underperforming. Lagarde sounded more balanced than a central bank geared to supporting growth if pressed. Up next is the Fed next week. We look at a technical adjustment in the works for the Fed’s reverse repo rate

From Wednesday’s FOMC meeting, a key question is whether the Fed shows a tendency to pause the rate cutting from the January FOMC meeting. We think they’ll indeed pause; the question is whether they want to telegraph that. Meanwhile, Germany’s issuance plan confirms plenty of supply to absorb in 2025. And, Gilt yields are set to remain elevated

Noteworthy here is the upside shift in the market expectation for the effective fund rate for end-2025. It’s essentially flat to the current 10yr SOFR rate. Something is mis-priced here. Most likely, long tenor rates are too low. Compared to the Fed, the ECB has more flexibility to cut rates if needed, posing downside risks to the EUR front-end

The 30Y Gilt yield hit the highest level since 1998 as higher US rates spill over to global curves

US Treasuries remain heavy, but it's not all about the US this time. The Euro curve remains under steepening pressure. Without a catalyst to reassess the ECB path, the front-end will remain anchored, while the back-end plays out inflation concerns and supply pressures. Gilt yields also continue to rise sharply. But a quieter US on Thursday might just calm things for a bit