Rates Spark: Middle East news isn’t impacting trading ranges
Markets appear untroubled by recent developments in the Middle East, with oil prices indicating that the crisis, at least in terms of market relevance, is largely over. Economic data from the eurozone gives little reason for rates to change course, while German spending plans are taking shape and highlight the fiscal impact of geopolitical change
Geopolitical headlines aren't translating into high volatility
The escalation in Iran this weekend didn't trigger sharp market moves, and Monday's attempts at de-escalation helped calm the markets further. Oil even ended the day lower than last week, with Brent falling back to US$70/bbl after a pre-announced retaliation by Iran that appeared to be more geared towards its domestic audience. Bunds reversed their earlier outperformance versus swaps, although a 10-year yield 2bp below swaps still reflects some demand for safety. Further retaliation from the Iranian regime could still challenge overall risk sentiment, but breaking from current trading ranges has proven difficult already. Over the past week, the 10y swap rate has stuck to a 2.52-2.6% range despite all headlines.
The overall economic picture in the eurozone remains one of weak but positive growth, and the data so far gives no reason for rates to deviate from this outlook. The PMIs on Monday failed to surprise and a eurozone composite index of 50.2 brings little excitement. Recent developments in the Middle East add to the uncertain economic backdrop, which we expect will continue to weigh on business confidence. But until the data turns into a material deterioration, we see no reason for markets to deviate from the expected European Central Bank landing zone of 1.75%.
EU second half funding plans do not explicitly mention defence yet as German funding plans start to take shape
The EU announced a €70bn bond funding plan for the second half of 2025. This is in line with guidance already provided at the start of the year which foresaw €90bn of issuance in the first half, of which €86bn has been realised, and €70bn in the second half to bring the total funding in 2025 to around €160bn. The EU mentioned that funds will be raised to meet needs related to NGEU and other policy programmes, “including support to Ukraine, the Reform and Growth Facility for the Western Balkans and Macro Financial Assistance programmes”, but does not yet mention the SAFE defence loan programme explicitly.
Today, the German debt agency will announce its updated issuance plans for the third quarter. Most expect only a moderate increase in the issuance plan at this stage. However, on Monday, the draft budget plans for this year indicated €143bn of new borrowing for the core budget and the special funds. In total, the budget plans for the current legislature until 2029 foresee additional borrowing of €846.9bn. This includes an increase in annual defence spending to €170bn by 2029 to meet NATO’s new 3.5% target.
Tuesday’s events and market views
After Monday’s PMIs, we’ll get the German Ifo survey numbers. Consensus sees the expectations component nudging slightly higher in June. From the US, we have the Conference Board consumer confidence indices, which are also expected to see some improvement. Meanwhile, the NATO summit could bring interesting headlines on defence spending ambitions.
More interesting may turn out to be the long list of central bankers scheduled to speak. Among the ECB speakers are President Christine Lagarde and Chief Economist Philip Lane, while from the Bank of England, Governor Andrew Bailey will attend the House of Lords. Fed Chair Jerome Powell will deliver a policy testimony before the House.
Slovenia will organise a syndication for a 10Y sustainability SLOREP estimated at €1.5bn. The UK has a 10Y Gilt linker auction for £1.7bn and Germany has scheduled a 2Y Schatz auction totalling €4bn, though the main highlight here will be the updated third quarter issuance plans released today. From the US, we have a 2Y Note auction for $69bn.
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