Eurozone: Expect 10yr yields to remain in the upper half of their range with mild bearish bias - ING

The research team at ING maintains a mild bearish bias and expect Eurozone’s 10yr yields to remain in the upper half of their range.

Key Quotes

“10yr Bund yields have fallen back towards the middle of their year to date trading range. ECB officials have diverted the attention from the solid macro backdrop to the still subdued inflation outlook, and that they have provided a prospect of only very gradual and cautious adjustments to their communication. This could take the edge off a potential tweak of the rate forward guidance in June.”

“The FOMC Meeting minutes suggested the Fed looks through the disappointing news on wages and inflation, but is also wary of the data flow. The market is currently pricing in a close to 80% probability of a June hike, with a further hike before year-end currently still given 1 in 3 odds. Barring an unexpected shock, the Fed seems intent to deliver in June.”

“EGB spreads. In particular smaller periphery spreads bounced off their lows in the past days. For GGBs the obvious reason was the disappointing outcome of the Eurogroup gathering, while the spread widening in Portugal is at least partly supply related. The government has sought a new waiver for additional early repayments €10bn in IMF loans to be made over the next 30 months. Notable within semi-core was the performance of the Belgian long-end after the 20yr syndication. While we expect a quiet start into a week which is shortened by UK/US holiday on Monday, the constructive patterns in semi-core should be supported by month end extension flows benefitting France in particular.”

“Upcoming data/events. The main focus will be on the US payrolls report due on Friday, which, if truly dreadful, could still significantly reduce the market-implied probability of a June hike. Following the fallback in April, however, our economists anticipate a rebound in wage growth. In the Eurozone the focus is on the flash core CPI reading for May due on Wednesday. A decline after the Easter-related spike to 1.2% in April seems probable, but if the core reading holds above February’s 0.9% figure, this might reinforce the ECB to drop the easing bias on rates in its forward guidance at the upcoming June meeting.”

“Scheduled EGB supply up to €20bn next week. Italy will be active on Tuesday reopening the 5yr and 10yr benchmarks as well as a floater line. Spain and France will be active on Thursday.”