Rates Spark: Kicking off a data-driven week

Euro rate markets are keenly awaiting economic data in the coming days to validate the more dovish sentiment we've seen lately. Growth concerns are pushing inflation risks to the background, and the eurozone consumer confidence index may get more attention than Spain’s inflation numbers. Having said that, if we were to get considerable upside inflation surprises this week, then the focus may be forced into a more balanced stance again.

But perhaps it’s going to be US data that will take the lead in European markets this week. While the spillover to the front end of the curve from the US has been limited, global risk sentiment remains a driving factor for longer-dated rates. US payroll data (scheduled for Friday) was one of the most important drivers for 10Y EUR rates in 2024. Over the past weeks, Bunds have performed very well as a risk-off asset, so they may be the preferred hedge for investors to hedge downside risks.

Besides data, we are also looking out for any concrete steps to simplify the ECB’s banking regulation. A task force has supposedly been organised with central bank governors from Germany, France and Italy. The details and timelines are unclear, but from a rates perspective, we’ll be paying attention to changes that could free up banks' balance sheet capacity.

In the US, the discussions on excluding Treasuries from the leverage ratio calculations seemed to have had a material impact on the spread between government bonds and swaps. With the ECB regularly looking to ensure a level playing field, this may be an area of interest. If this is indeed a direction taken, then we could see increased aggregate demand for European government bonds, with a tightening effect on the spreads versus Bunds and swaps.