Government bond markets remain in rough waters

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• Mixed signals have come from the Middle East. On the one hand, there are reports that oil shipments through the Strait of Hormuz, apart from registered vessel traffic, are continuing to rise. On the other hand, Iran has reportedly stepped up its attacks on ships in the strait.
• The U.S. jobs report for September disappointed in every key respect. Job growth was well below expectations, while wage growth continued to slow.
• In the eurozone, inflation jumped to a three-year high in September.The core rate, on the other hand, trended only slightly upward.
• ECB Chief Economist Lane advocates a “moderate” monetary policy response to rising energy prices. The recent sharp rise in long-term interest rates is already putting a greater brake on growth and inflation than the ECB had previously assumed, he said.
• In France, Marine Le Pen, a leading presidential candidate, has presented plans to significantly reduce the government deficit ratio in the coming years. Speculation about ECB interventions in the government bond market has been countered by both the central bank and the French government.
• The latest auction of 10-year U.S. T-Notes has seen the strongest investor demand in more than ten years. The latest tap of the 30-year T-bond also met with above-average demand.

What could drive the market next week?

• The financial markets remain under the spell of news from the Middle East and developments in commodity prices.
• In addition, investors are likely to continue to closely monitor information regarding France's budget plans for 2027.
• As for the macroeconomic calendar, the focus will be on the U.S. consumer price data for September. Another rise in headline inflation seems a done deal. The trend in the core rate could provide important clues for the Fed's next interest rate decision.
• The IMF is presenting its new World Economic Outlook as part of its annual meeting.
• The primary market for U.S. Treasuries is set to be quiet next week. Meanwhile, supply pressure in the primary market for euro-denominated government bonds is likely to increase significantly compared with last week. We expect a gross supply of up to 40 billion euros, compared with just over 11 billion euros the previous week. Meanwhile, net cash flows are set to plummet deep into negative territory due to a lack of reflows.

Elmar Völker, Senior Fixed Income Analyst