Fixed Income
Bond Respite In line with our view last week, the bond markets experienced a bounce from oversold territory. Can the bounce continue? Possibly, yes, given the current weakness in equity markets, and the ongoing search for yield. However, in light of G7 inflationary pressures, we remain cautious beyond the short-term.
Let’s start with the bund again. Well, it performed exactly as suggested, bouncing from the 121.20 area to resistance in the 121.80-122.00 region. Further upside will require a close above the 122.00 level, which would set up a rally to the 122.50 mark.
As for Treasuries, our short-term view of the 10-year instrument is playing out, with the yield easing back to 4.39%. As such, a test of the 4.36% level, to which we alluded last week looks highly likely. This is a key trendline support level, though, that we would expect to hold. Any break below, however, would suggest a move to the mid- to high 4.20s.
Beyond the short-term, we can still envisage Treasury yields adjusting higher, as the short-end of the curve moves up due to further interest rate hikes from the Federal Reserve. As we keep arguing, though, such an adjustment is unlikely to be long-term in nature, for two reasons. Firstly, at some point tighter monetary policy will rein in inflationary pressures, and weigh on economic activity. Secondly, desire to achieve sensible levels of yield by the G7 pension fund industry will make higher Treasury yields most attractive, all else being equal.
Visit Market Opinion [+]
|
