Rates Spark: Unbroken Momentum in Bear Steepening as Shutdown Aversion Fuels Yields

Rates Spark: Bear steepening momentum is unbroken

The bear steepening of curves resumed after a US government shutdown was averted and accelerated after better data. Cut discounts are pared as central banks play it safe on inflation. In Europe, Italian spreads recover amid a strong showing on the first day of its retail bond sale.

 

No excuses to end bear steepening of curves

The bear steepening of yield curves has resumed this week. A US government shutdown – which could have provided some excuse for rates to retrace lower – was averted over the weekend. This has meant riskier assets had started off on a firmer footing, but at the same time, higher yields. The 10Y UST rose towards a new cycle high of 4.7% and in Europe, the 10Y Bund yield rose above 2.9%. Obviously, a better-than-anticipated ISM manufacturing as well as some upward revisions in eurozone regional PMIs also helped, but it seems only a matter of time before the 5% and 3% marks respectively are reached.

The shutdown story was noise, and though it might still come back to haunt markets later in November, the overarching narrative is that we are still in an environment of elevated inflation. Despite improvements, last week’s core PCE release for September was still close to 4% and the core CPI estimate for the eurozone even a tad higher at 4.5%. With activity not collapsing and labour markets resilient, central banks will try to brush away any hint of rate cuts discussion.  

 

5% UST yield and 3% Bund seem only a matter of time

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