EUROPEAN FIXED UPDATE: Upward bias takes hold despite initial two-way action, US 7yr due

Analysis details (11:00)

• Core benchmarks have seen another session of significant two-way action, with drivers behind the initial move and subsequent pullback relatively limited but intersected by the Ifo release.


• Initially, amid a without-catalysts bought of upside in the equity space, core benchmarks pulled back modestly from initial limited upside of circa. 10 ticks from the Bund’s 150.31 opening level. A move that continues the trend of recent sessions where pronounced yield upside has been seen, German 10yr yield posting gains in excess of 14bp WTD. However, this pullback eased going into the German August Ifo release on which the initial remark that morale fell resulted in a small jump to a session peak, at that point, of 150.87. Once the metrics were released in full and beat expectations across the board, despite falling from revised priors, pronounced pressure occurred across the complex sending Bunds to 150.64. Accompanying commentary was relatively in-fitting with the S&P Global PMIs, remarking that a recession remains possible but the good news is that supply chain bottlenecks have eased significantly. On the inflation front, and perhaps fanning the shortlived lift in yields, Ifo adds that almost 50% of Cos intend to raise their prices in the next three months. Amidst this, European peers and USTs have been moving in tandem directionally though magnitudes differ a touch as the overall tone is tentative awaiting Chair Powell on Friday.


• Note, the morning’s Italian and UK issuance was uneventful, with the UK outing strong but lacks relevant comparables while Italy’s cover was essentially unchanged despite an elevated yield.


• Currently, Bunds reside just off a 150.96 peak, a high that printed as the post-Ifo pressure eased and shy of the 151 mark and touted resistance at 151.06 thereafter; reminder, if another bout of downside action is seen then potentially key support comes into play at 149.69.


• In the periphery, BTPs are bid by just over a point at best (122.58 peak) while the spread to Germany has narrowed incrementally from the week’s ~235bp widest point. The FT, citing S&P Global, writes that bets by hedge funds against the Italian benchmark have increased to their highest level since January 2008, with more than EUR 39bln in play. Positions that have been placed heading into the Italian election and given the nations high exposure to gas prices.


• Finally, USTs are at session highs of 117.16+, with the associated 10yr yield around 5bp lower than Wednesday’s 3.12% peak though the broader yield curve is somewhat mixed awaiting 7yr supply to round off the week’s issuance before Jackson Hole. This morning Fed’s Bostic (2024 Voter), who last spoke end-July, said he is yet to decide between 50bp or 75bp for September, adding that if data remains strong and inflation clearly does not soften this could make the case for another 75bp hike. Going on to say that he is upbeat on the economic outlook.

25 Aug 2022 - 11:00- Fixed IncomeResearch Sheet- Source: Newsquawk