Rates Spark: Plenty of supply as we approach summer

Taking oil markets as an indicator, investors are still showing some optimism with Brent testing towards US$94/bbl earlier on Wednesday. Market sentiment stayed largely unfazed by headlines indicating that reaching a final agreement remains difficult, with Brent staying below US$100/bbl. While equity markets turned softer overnight, sentiment remains well-supported by the tech narrative. It is not just indices still closer to their highs, but also the common equity risk gauges like the VIX having come down to levels last seen before the crisis.

Rates markets are still displaying elevated central bank pricing. The European Central Bank is widely expected to hike rates next month, a view clearly underpinned by recent ECB comments, and overall, more than two hikes in total are still baked into the money market curve. More importantly, the market seems to have come to terms with the prospect of some ECB tightening being necessary. Rate volatility measures have come down more than elevated rate expectations would suggest. In eurozone government bond markets, that bit of reduced uncertainty has been enough to pull the widely observed spreads versus German Bunds tighter alongside.

More recently, we are also seeing increased activity in primary markets again, as issuers make use of this window of opportunity as the summer break draws closer. Last week was busy, and this week, we have already seen Spain launch a new 10y bond, and in the broader €-denominated SSA sector, the EU’s ESM, French UNEDIC, Italy’s CDEP and Dutch BNG have brought new bonds to the market.

Looking ahead, Austria and Portugal have announced deals for an unusual dual tranche: Austria targeting two new issues (5y and 15y), and Portugal targeting a new 20y bond. On the SSA side, Dutch issuer NEDWBK has mandated a 7y deal, and the autonomous Community of Madrid is also in the market for a 5y European Green Bond.