Rates Spark: September seasonality
There is a well-defined tendency for bond supply to rise at the start of September, and for yields to do the same, at least judging from past years. We expect rates to continue drifting higher into the ECB meeting, where hawkish risks outweigh dovish ones in our view.
Supply is seasonal, but are yields?
So far this week, rates markets seem in no hurry to heed our call for higher yields, although US markets retuning from a long weekend and limited risk appetite ahead of the ECB meeting go some way towards explaining the lack of direction. Things will liven up today with the return of primary market activity, most notably the launch of a new 20Y green bond from Spain, but also from smaller issuers on both sides of the Atlantic.
EUR syndicated bond supply typically jumps in September
Things will liven up today with the return of primary market activity
A resurgence of supply doesn’t always translate into a rise in yields, mind you. What makes the start of September special is the magnitude of the jump in issuance from the dull days of August, to the hectic ones in September. It is also worth noting that a host of other factors might be at play to explain rates movements in September, for instance investors shedding carry trades held over the summer to capitalise on uneventful markets. As it happens, we did agree with that view back in June.
Yes they are! But they have moved a fair bit already
More to the point, we detect a fairly well-defined tendency for developed market rates to rise in the two weeks following the Labor Day holiday, due to the reasons mentioned above. Out of the past five years, four saw non-negligible rises in 10Y Germany yields over that period. The median change was just under 10bp, with most of the rise achieved in the five trading days following Labor Day (ie by the following Monday). Looking at this year, we think this analysis is relevant, but the conclusion is mitigated by the fact that German yields have already risen by roughly that amount in the run-up to the Labor Day holiday.
German 10Y yields rose after the Labor Day holiday in four of the past five years
Still, with the ECB meeting approaching fast, we expect yields to drift higher into Thursday, driven by supply. What happens then is in the hands of ECB group dynamics but we think the risk of a PEPP taper, and the difficulty in communicating this decision could send yields higher still.
Today’s events and market view
The German ZEW survey is probably the release with most market-moving potential today although this isn’t saying much given the dearth of tier one releases. Still, it will be interesting to get an early peek at what sentiment indicators might look like for September. Given that today is only the 7th of the month however, it is fair to say that a lot might happen between now and October. Judging by the Bloomberg consensus, our peers expect a further decline in the forward-looking component, which isn’t entirely surprising looking at US and Asian data of late. Would markets care? We think so. ZEW has had a decent lead with the IFO lately.
On the other hand rates markets have a bigger fish to fry, namely supply. There are a couple of minor auctions scheduled for today from Austria (5Y/10Y bonds) and Germany (25Y linker). These will be dwarfed by the launch of Spain’s first ever green bond. The bond will carry a 20Y maturity and the sovereign aims to raise EUR €5bn, an eminently achievable target compared to the ballooning demand for green-tinged assets. We wrote about pricing considerations and about the implications for the broader green bond market in a separate note.
The US Treasury kicks off this week's auctions with the sale of 3Y T-notes for $58bn.
This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more