EUROPEAN FIXED UPDATE: Further yield extension as pricing for a 75bp ECB hike increases

Analysis details (10:50)

• Core benchmarks are under pronounced pressure once more with yields across the board at fresh near-term peaks and the action beginning to influence the BTP-Bund spread, despite the pressure being broad based in nature. 


• Specifically, the Bund Sep’22 contract has fallen below the 147.00 mark to a 146.78 trough with little by way of support touted aside from half/full point marks before 145.34. Broadly speaking, action continues to be driven by hawkish anticipation going into next week’s ECB meeting with market pricing now as high has 85% for a 75bp move; note, the quiet period prior to the policy announcement has now commenced.


• The renewed pressure in core counterparts has occurred despite geopolitical tensions increasing between China and Taiwan and stumbling blocks to the IAEA’s Zaporizhzhia visit. Though, the passing of the morning’s heft issuance docket has seemingly provided some relief and benchmarks have been able to lift around a third of the way from earlier lows following this. Overall, the morning’s issuance was well received and has kicked off what is typically the start of a busier month of supply, particularly when compared to the summer lull. On this, ING writes that while it may be tempting to say yields have hit a peak given hawkish pricing and the inflationary backdrop, expectations for increased issuance ahead perhaps makes this view somewhat premature. For reference, the German 10yr yield has hit a 1.63% peak (vs 1.92% YTD peak) while the UK has hit a fresh YTD peak of 2.91% today.


• Sticking with yields but looking to the periphery, the Italian 10yr marginally eclipsed the 4.00% mark (vs 4.27% YTD peak) this morning and as such the BTP-Bund spread has managed to break out of recent ~230bp parameters to a 243bp peak. Though, given the increase is seemingly a function of expectations and as we have entered the quiet period, participants will have to wait for the announcement from the ECB for a view, if one is provided, on whether such a widening is justified or not.


• Stateside, USTs are under similar directional pressure but have been somewhat more contained in European hours as the complex awaits key data in the form of ISM Manufacturing PMI today and the NFP report tomorrow, after the return of ADP yesterday. Currently, USTs are impaired by just over 10 ticks, but similarly off lows, with the yield curve a touch steeper overall.

01 Sep 2022 - 10:50- Research Sheet- Source: Newsquawk