Rates Spark: Dovish sentiment with cuts on the horizon

We’re going into this week with a dovish market backdrop, as the Fed's Waller ended last week with assurances that the US central bank would act "quickly and forcefully" if the labour markets show significant deterioration. The dovish sentiment was also reflected in the firming up of the disinversion of the UST curve. Already on Friday the 2Y10Y curve disinverted, reaching a spread of 6bp at its peak, and thereby seems to have more definitely broken the zero line. On Monday, the spread settled a tad lower at around 4bp, but going forward we see the curve steepen further as the first Fed cut looms.

Bund curves also found themselves steeper, although the 2Y10Y is still some 5bp away from a disinversion. This Wednesday, plenty of EUR issuance is scheduled, including syndication from the EU and Italy, at least temporarily adding to the steepening pressure from the backend. 

In the eurozone, the Bund curve bull steepened on Monday as markets digested Waller’s speech that occurred after Europe's market close. The Sentix investor confidence data came in at a disappointing -15.4, well below the consensus of -12.2 and helped Bund yields lower on the day too. But overall risk sentiment seemed alright, with equities advancing on the prospect of incoming cuts.

In politics, we had an appeal by Draghi for additional EU investments totalling €800bn. Financial markets did not seem fazed by the proposal and even 10Y EU-Bund spreads continued to trade close to 60bp. In other news, France requested the EU postpone the deadline for filing plans to address the budget deficit. The deadline is set for 20 September, but given Prime Minister Michel Barnier was only just elected, the timeline seems tight. No potential new deadline was mentioned.