Global Fixed Income: Breaking New Ground? -

Global Fixed Income: Breaking New Ground?

Oct 10, 2018Jeremy ParkinsonFinance, No picture0

It was an incredibly volatile week in the bond market on both sides of the Atlantic, as the month of October got underway. The overarching theme at week’s end was higher yields in both the U.S. and the eurozone. Was this renewed move to the upside in rates caused by any groundbreaking developments? And what could this mean going forward? Here are some key takeaways:

U.S. Treasuries (UST)

The UST 10-Year yield broke above its May high point of 3.11% and posted its highest level since 2011, coming in just under 3.25%. While some of the key catalysts may have been economy-related and a reversal of the “Italian flight-to-quality trade,” perhaps most important were comments the market deemed “hawkish” from the Federal Reserve (Fed) chairman, Jerome Powell.

While Powell’s comments on the surface didn’t seem to represent any shift in Fed policy thinking, he did state that “we may go past neutral” when referring to future Federal Funds Rate hikes, a more aggressive stance than the market had been priced for.

Headlines from the September jobs report were mixed, with the attention grabber being the unemployment rate dropping to 3.7%, the lowest level since 1969!

In my view, and most likely the Fed’s as well, the most noteworthy aspect continues to be average hourly earnings (AHE), which rose at a +2.8% annual rate, or -0.1 pp below last month. If AHE breaks above the +3.0% threshold, inflation expectations could get reignited.

EUR Government Bonds

The recent sell-off in Treasuries is rippling through euro bond markets as well. This factor only added to the reversal of the previously mentioned “Italian flight-to-quality trade.”

Ten-year German bunds stand at 0.56% as of this writing, or up 14 basis points (bps) from last week’s low; 10-year U.K. gilts were at 1.69%, up 17 bps from last week’s low, while 10-year Italian BTPs are at 3.39%, up 56 bps from levels before the heightened downgrade fears.