The US $22bn 30-yr bond auction offered a third argument

KBC Market Research Desk KBC Bank

Markets

The US Treasury curve bull flattened yesterday with yields ceding 1.2 bps (2-yr) to 7.1 bps (30-yr). The move at the (very) long end of the curve started in the build-up to the US trading session and lasted into the close. A first motive is technically-inspired with the US 10-yr yield and US 30-yr yield for example testing, but failing to take out, Wednesday’s intraday top (and multi-annual high) at respectively 5.36% and 5.73%. Secondly, energy prices topped off after US President Trump put rumours to bed about launching another military action against Iran ahead of the mid-terms. The US $22bn 30-yr bond auction offered a third argument. While bidding metrics weren’t as strong as Wednesday’s $39bn 10-yr Note sale, they send the signal that the marginal buyer of US Treasuries is starting to show up at current nominal yield levels. Finally, but that needs to be tested, we might see a return of the traditional correlation where fragile risk sentiment creates an offer for core bonds. The last couple of weeks, it was often the other way around with weakness in core bonds harnessing risk sentiment. If the core bond recovery persists today, weekly technical charts will send a short term reversal signal. We saw the same at the (very) long end of the EUR swaps rate curve last week. Unlike US yields, there were effectively no new highs in Europe this week.

The euro enjoys the energy-tailwind this morning, but we throw some rumours in the mix as well. Bloomberg reports that ECB President Lagarde at a closed-door meeting of EMU finance ministers stressed that the ECB is attentive to the good functioning of financial markets (sovereign spreads). While we’re probably not even close to any such potential intervention, it might serve as some sort of early warning system. We’re keen to see the French OATswapspread today which yesterday swung back and forth between 126 bps and 133 bps (close). That remains elevated. To put things in perspective: we started the week at 135 bps and reached an intraday all-time high at 145 bps last week. EUR/USD treaded water around the 1.12 handle yesterday and tries to make some headway this morning. EUR/GBP tries to find a floor after testing the YtD low at 0.8455 twice this week.

Today’s eco calendar is thin apart from University of Michigan October consumer confidence. We closely watched the inflation expectations component following this week’s significant increase in the NY Fed’s gauges. They’re not expected to impact trading in light of the bigger themes. Better times for core bond markets could be ahead if confirmed by today’s action.

News and views

The European Commissioner for financial and economic affairs Dombrovskis pushed back against the most recent calls from Greece and Italy to allow more fiscal leeway, specifically to combat the energy crunch. In light of the current bond market developments, he’s emphasizing the need for fiscal prudence instead, he said. Dombrovskis nevertheless added that they’ll look into the suggestions. The Greeks are calling to exempt certain temporary support measures for households and business from the net expenditure benchmark while also taking into account the additional VAT revenues generated by the unexpected rise in prices. Italy, meanwhile, is proposing that part of the additional tax revenues generated by higher inflation be used to fund temporary and targeted measures. The EC in an earlier decision already allowed EU governments to use up to 0.3% of GDP (capped at a total of 0.6% over 2026-2028) from existing defence fiscal flexibility for clean energy investments in 2026, 2027 or 2028.

National Bank of Poland president Glapinski yesterday said there’s no indication so far that rising energy prices have been spreading into the broader economy, including in the form of second-round effects. He made clear there are no imminent reasons to worry about inflation accelerating. Glapinski did add that the committee is ready to act if inflation risks continue to mount. Asked whether a rate hike could happen at next month’s meeting, Glapinski didn’t rule it out although he does not foresee such a scenario. His comments dampen the probability of a such a move after having kept the policy rate steady at 3.75% at the policy meeting earlier this week. The Polish zloty barely budged yesterday with EUR/PLN closing around 4.38.

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KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

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