Thursday, 20 October 2022
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•          We’ve grown more used to large bond yield moves over the past few months. But it still feels extraordinary when they appear out of thin air. That’s what happened yesterday during a trading session that hadn’t much to offer in terms of important economic data or other events. Yet core bond yields hit new (closing) cycle highs at almost all maturities. US bond rates shot up between 9.5 bps and 13.6 bps in a flattener even with housing data coming in mixed – at best. Comments from Fed’s Kashkari (“no evidence that core inflation has peaked”, “more serious risk from not enough tightening”) and Evans helped sustain the move going into the US close. Bullard said that frontloading could end this year before shifting to keeping policy sufficiently restrictive with small adjustments as inflation cools in 2023. German yields added 11.8 to 12.3 bps in the 2y-5y segment, again underperforming swaps. Gilt yields were the exception even as UK CPI went back to the double digit area (10.1%). The ultralong end tanked more than 30 basis points, bringing the 30y back below 4% for the first time since end September. This is still a direct consequence of the Bank of England excluding that part of the curve (for now) in its bond selling programme starting November 1. Stock markets pared gains in Europe to just 0.2% or suffered minor losses up to 0.85% in the US. The US dollar held sway in currency markets with everyone eyeballing USD/JPY as it neared the 150 (intervention-triggering?!) barrier. EUR/USD retreated from 0.986 to 0.9777. Sterling traded without a clear direction. EUR/GBP closed unchanged above 0.87.

•          Asian stock sentiment was gloomy but got a little boost from reports that China is considering to cut quarantine time. The country’s very strict Covid rules weigh on demand and continue to hamper supply chains. The news is seen a first step in the other direction. Chinese stocks erased losses to turn slightly positive and is pulling peers away from intraday lows too. The dollar pared gains. Core bonds trade around or even slightly below yesterday’s closing levels. The BoJ this morning stepped in with an unscheduled bond buying spree (see below). Given the empty economic calendar and upcoming events (ECB next week), we would normally argue for wait-and-see trading behaviour. However, yesterday showed this doesn’t need to be the case per se. Especially with many parts of the yield curve, both in the US and Europe, having risen above previous cycle (closing) highs there’s room left for more from a technical point of view. On currency markets all attention is going to USD/JPY. 149.95 and counting.

News Headlines

•          Job growth in Australia unexpectedly came almost to a standstill in September, with a rise of only 900, compared to market expectations for a gain of about 25 000. Full time jobs rose modestly (13.3k). Part time employment declined. The participation rate stabilized at 66.6%. At the same time, the unemployment rate stayed very low at 3.5%. The labour market gradually moving to a more balanced condition supports the case for the RBA holding to a slower pace of rate hikes. At the October 4 meeting the RBA raised to policy rate by ‘only’ 25 bps to 2.6%, while markets expected a bigger increase. For the next RBA meeting on November 1, the market expects a similar 25 bps step. Despite the softer than expected labour market data, Australian bond yields are rising about 13 bps across the curve this morning on the global market repositioning. AUD/USD dropped to currently trade in the 0.6245 area, with the cycle low set earlier this month at 0.617.

 •         The Bank of Japan this morning announced an unscheduled bond buying operation as the broader rise in global yields pushed the 10-y Japanese government bond yield above the 0.25% cap. To prevent a further rise the BOJ announced to buy an unlimited amount of 10-y Notes at a 0.25% yield. The BoJ also intends to by JPY 250 bln of bonds starting from a maturity of 5-year. The operation today illustrates that the BoJ continues to withstand the global trend op yield normalization, which also translates into persistent weakness of the Japanese currency. This weakening in September also resulted in a 44.9% Y/Y rise in the import bill. However, the value of exports also rose to 28.2% to JPY 8.8 trillion record level, slightly easing the adjusted trade deficit to JPY 2.01 trillion.


The ECB ended net asset purchases and lifted rates by a combined 125 bps at the July and September meetings. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. The correction end of September found support at the June high. Germany’s 10-yr yield is retesting the highest levels since 2011 (2.35%) with real rates driving the push higher.

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2008 (4.01%) before staging another leap higher after a few previously failed tests. The next key reference stands at 5.32% (2008 high).

EUR/USD is in a strong downward trend channel since February. The dollar remains the main beneficiary of rising US (real) yields in a persistent risk-off context. Geopolitical and recessionary risks are bigger for Europe, holding down the single currency as well even as the ECB finally embraced on a tightening cycle. Resistance stands at EUR/USD 0.9950/1.0050. The YTD low stands at 0.9536.

The new UK Chancellor tossed the mini budget to the bin. It triggered a relief rally in gilts and to a lesser extent in sterling. Lingering political uncertainty (Truss’ position), yawning twin deficits (despite the fiscal U-turn) and the now greater risk of a biting recession undermines the pound’s attractiveness nonetheless. EUR/GBP 0.86 should survive as a support.

Calendar & Table

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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