Rates Spark: Century Time

We doubt the improvement in sentiment on the back of PMIs is sustainable but do admit that some financial indicators, helped by last week's TLTROIII, are flashing green. Sovereign spreads should continue on their tightening course.

Bloomberg, ING

Survey perceptions versus virus trajectories, a dovish ECB ensures Eurozone periphery bonds stand to benefit either way

We would tend to regard the jump in bond yields on the back of stronger than expected PMIs yesterday as more of a blip likely to be reversed than as the start of a new trend. There is no denying that sentiment is improving and that the ‘V-shaped recovery’ narrative is so far helping markets ignore the steep covid infection curve in the Americas and elsewhere. We think the surprise is out of sentiment indicators today so it would take more than a beat in the IFO to cause another rise in yields in our opinion.

This being said, we reiterate our view that the most attractive risk-reward is to be found is Eurozone peripheral debt, arguing that they stand to benefit from both improvement and deterioration in risk sentiment. 10Y Italy-Germany spread at 150bp seems like a realistic short term target to us. The ECB’s chief economist Philip Lane could reinforce the feelgood factor in this market if he strikes a tone similar to his blog post from Monday. Euribor fixings have also been on a declining path in recent weeks and the settlement of the proceeds of last week’s TLTRO III allotment should continue to cement expectations of surpressed front-end rates.

It is tempting to overplay the importance of the EU recovery fund on the trajectory of peripheral yields but, at the margin, the positive tone at the Rutto/Macron encounter yesterday should be helpful for spread tighteners. Closer to the market's mind, reported progress towards addressing the German Constitutional Court's ruling would also help confidence that ECB QE is here to stay.

 

Today's events: Austria's 100Y bond, IFO survey

The main data point in European time will be Germany's IFO. The beat in PMIs yesterday has likely skewed expectations higher.

Austria has mandated banks for the launch of a €2bn 100Y RAGB yesterday which we expect to price today.