Bond market rebound stalls ahead of U.S. midterm elections

Bond market rebound stalls ahead of U.S. midterm elections – Review and Outlook

What drove the bond markets last week?

• U.S. President Trump has announced that a decision on how to proceed with Iran will be made soon. There is a risk of military escalation. Iran is threatening that, if this happens, it will target U.S. allies in the region more aggressively than before.
• France can breathe a little sigh of relief. The latest wave of protests has seen less escalation of violence than the previous one. The rating agency Moody’s® has also decided not to downgrade the rating for the time being.
• The ECB, the Fed, and the BoJ have all left their key interest rates unchanged. Meanwhile, central bankers did not dispute the wide spread expectation that they will tighten monetary policy, again, before the end of the year.
• Growth in the U.S. economy accelerated in the third quarter, even though foreign trade had a significant dampening effect.
• The ifo Business Climate Index for Germany posted its sixth consecutive increase in October as expectations improved.
• At the most recent auction of 10-year German government bonds, investor demand was, once again, insufficient to fully cover the planned issuance volume.

What could drive the market next week?

• The financial markets remain in the grip of news from the Middle East, commodity prices, and political developments in France. New waves of protests have been announced across Europe for the upcoming weekend, including in major German cities.
• In the U.S., citizens are being called to the polls for midterm elections for both chambers of Congress. Polls suggest that the Democratic opposition is about to win a majority in the House of Representatives, at the very least, and presumably in the Senate as well. In California, there is also a vote on a billionaire tax.
• The Bank of England is set to raise its key interest rate for the first time since August 2023.
• According to our forecast, inflation in the euro area will reach the 4% mark in October for the first time since September 2023. We expect core inflation to remain stable at 2.5%.
• In the U.S., the October jobs report will be the week's key macro-economic event. We expect sluggish employment growth and a stable unemployment rate.
• The primary market for U.S. Treasuries is set to be quiet next week. The focus will be on the U.S. Treasury's quarterly refunding statement. Meanwhile, activity in the primary market for EUR government bonds will likely remain stable compared with last week. We expect the gross supply to total approximately 25 billion euros. The focus will be on the next auction of long-term French government bonds. Net cash flows are set to surge well into positive territory, given well above-average reflows from maturities.

Elmar Völker, Senior Fixed Income Analyst