Is the mood shifting on the bond market?

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• A renewed escalation of the military conflict between Saudi Arabia and the Yemeni Houthi rebels is keeping tensions high in the Middle East and driving up energy prices. Natural gas prices in Europe marked their highest level since late 2022.
• U.S. inflation rose more than expected in September. The core rate also came in higher than expected, as price pressures in the services sector mounted.
• Several influential Federal Reserve officials have spoken out against hasty further tightening of monetary policy.
• Remarks by Broadcom's CEO have fueled concerns that the AI investment boom may be coming to an end.
• The IMF has revised its global GDP growth forecast slightly upward, but at the same time warns of risks to the global economy's resilience.
• In France, the second government bond auction since the recent escalation of deficit concerns again proceeded rather smoothly overall. The Trésor was able to place bonds with maturities ranging from five to seven years, completely filling the targeted total volume of 12 billion EUR.

What could drive the market next week?

• The financial markets are set to remain under the spell of news from the Middle East and developments in commodity prices.
• In addition, investors are likely to be paying close attention to information regarding France's budget plans for 2027. Meanwhile, France is facing a potential credit rating downgrade by Moody’s®.
• As for the macroeconomic calendar, the focus will be on the purchasing managers' indices for the eurozone. According to our forecast, the recent positive trend in sentiment is facing a modest setback.
• China will be the first among the major economies to release its GDP growth figures for the third quarter.
• In the primary market for U.S. Treasuries, the focus next week will be on the tap of the 20-year T-bonds. Meanwhile, supply pressure in the primary market for euro-denominated government bonds is expected to slump sharply compared with last week. We expect gross supply of only about 3 billion EUR, down from more than 40 billion EUR the previous week. Thanks to solid reflows from maturing obligations, net cash flows are poised to make a significant leap well into positive territory.

Elmar Völker, Senior Fixed Income Analyst