Market Comment | Bonds regain favor as easing expectations from the Fed and ECB strengthen


  • U.S. - China high level officials discussed trade in a second round of principal level phone call yesterday. However, face-to-face talks are still not scheduled. The U.S. is undecided on the nature of supply relief to be provided to
  • Huawei without compromising on national security risk. Treasury secretary Mnuchin noted that allowing U.S. sales to Huawei is an issue independent from trade talks. U.S. insist that China should bolster its purchases of U.S. agriculture goods. On the other hand China wants the U.S. to completely lift sanctions against Huawei, and cancel all existing tariffs against China.
  • The relatively downbeat backdrop has reinforced expectations of Fed’s insurance cut and a likely strengthening of its forward guidance by the ECB next week. That said, concerns exist that easing expectation for Fed might be overdone.
  • During the week, 10Y UST yields declined across the board, trimming the increase seen after the strong payrolls two weeks ago. Downward pressure in European yields intensified after news about the potential revamp of ECB’s inflation target, along with disappointing EZ data (10Y German yield -11bps to -0.32%). Search for yield benefited
  • EZ peripherals, although dangling prospects of a snap election in Italy amid lingering tensions within its coalition government, could undermine the recent allure for Italian bonds. Today the Italian risk premium went up by 8 bps.
  • EM yields also declined this week, underpinned by interest rate cuts or dovish rhetoric by several EM central banks, mainly in Asia, over the past week.
  • Downward pressure on yields has caused some distortions in bond markets. Currently 4% of the corporate High
  • Yield USD and EUR denominated bonds (excluding financial sector) are yielding negative rates.
  • Oil prices rose on Friday, but fell throughout the week, the largest weekly decline since May, amid cautious global trade prospects and fears of oversupply.
  • The US dollar halted its appreciation trend, while safe haven currencies appreciated. Negative economic data dragged on the euro, while concerns about no deal Brexit weighed on the GBP during the week. Meanwhile EM FX remained steady.

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