Rates Spark: High issuance amid light data calendar

The start of the week has seen rates move in a bit of a sideways range with little news flow to provide direction. Monday’s European holiday saw US rates trading under pressure from a busier corporate issuance slate followed by some retracement of said move on Tuesday. This morning, the higher-than-anticipated UK inflation figures provided a bearish impulse. But also given the issuance pipeline, we think markets could well resume their bearish bias. In the eurozone, France, Austria and Portugal have used the opportunity of a quieter auction and data schedule to announce new syndicated deals. In the US, we will be looking ahead to tonight’s 20Y bond auction, which tends to be a trickier point on the curve to sell bonds.

There were a couple of Fed speakers yesterday which confirmed our view that last week’s inflation data was a step in the right direction but far from gave the all-clear to price in more and/or timelier Fed cuts. That can still leave rates to test the upside again within current ranges, even though we do see lower inflation and slowing activity later this year precipitating a series of cuts starting in September.

The Fed’s Christopher Waller, for instance, said several more months of inflation data were needed before considering a rate cut, at least in the absence of any significant weakening in the labour market. Raphael Bostic reflected a similar view – “one number is not a trend” – and sees a cut not before the fourth quarter. The market is currently still leaning towards a first cut already in September (18bp priced) with a second cut only fully priced by January next year.