Bond market - Nervousness on US treasury market on rise

EZ – Industry sentiment expected at stable level in May

Next week (May 23), the first flash estimate for industry PMI data will be released for Germany, France and the Eurozone. In April, the trend indicator once more declined marginally, to 56.2 index points. On a regional level, sentiment remained highest in the Netherlands, Germany and Austria in April. The drop in sentiment was mainly driven by the decline in order inflow. However, this is no surprise after the previous boom phase. The recent weakness of the euro vs. the dollar might once again offer support, especially to export orders in the near future.

After the deterioration of sentiment during the first four months in 2018, we expect stabilization of the Eurozone's industry sentiment in May. Despite volatility on financial markets, the global economic environment remains solid. Emerging Market currencies recorded almost stable development despite the recent dollar strength and the fact that commodity prices rose to new annual highs in mid-May (due to the oil price development). After a period of weak growth in 1Q18, we expect growth acceleration in 2Q18 within the Eurozone. The weakness in foreign trade should especially be adjusted in this environment. Unchanged, we expect Eurozone GDP to grow by approx. +2.4% in 2018.

US treasuries and Italian government bonds under pressure (this week)

This week, the bond markets began to stir, especially in the US. US treasury yields increased markedly and all maturities reached multiannual highs. This movement was triggered by the release of April retail sales data. This market reaction came as a surprise, as the growth rates conformed to market expectations to a great extent. However, the data did display good development for the second month in a row and thus confirmed expectations of a recovery after very weak retail sales data from December to February. Besides, nervousness is justified on the market. Even though the inflation data does not reveal any clear indications of a pickup so far, the environment justifies the market movement, in our view. The persistently sound economy, combined with a very low unemployment rate, represents an inflation risk. Simultaneously, the yield level is still low by historical standards and thus provides hardly any buffers for negative surprises on the part of inflation development.

We maintain our forecast of moderately rising yields in the upcoming quarters. But we are currently evaluating our assessment of the US treasury market with regard to a possible elevation of our yield forecast.

Market movements were also noticeable for Eurozone government bonds. The yield of the 10-year German Bund bond rose, though significantly less than its US counterpart. The US treasury bond reached its highest reading since 2014, whereas the corresponding 10-year German government bond still remained clearly behind this year's high. Italian government bonds recorded significant movements. Key points of the government program from the presumable new government caused upheaval on the markets. An EU-critical position combined with an increase in expenditure led to rising yield premiums of Italian government bonds. However, the yield markup is still lower than it was a year ago. Further development will depend on the political news flow.

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