ab16 February 2024Global Research and Evidence LabGlobal Rates StrategyRates Map: Bond market on data-dependent modeIn Europe, we have been neutral European duration into January ECB, inflation and strong supply. We think that European rates will remain under pressure in the coming weeks amid stronger global data and policy rate uncertainty. Nevertheless, we anticipate buying interest to pick up, if 10y bunds move closer to 2.5% levels, considering the repricing in the policy rate path and expectations of gradual supply slowdown. We think 10y bund yields ultimately settle lower given the UBS baseline of sluggish growth, even if forward-looking indicators improved somewhat. We expect the third BTP Valore issue next week to attract high demand (expected ~€15-17bn), leading to BTP spreads reaching levels close to 140bps. Despite the challenging market conditions, including the repricing of ECB policy rate expectations and record-high January supply, peripheral spreads have remained resilient. BTP spreads continue to trade with a high beta to EUR duration. Demand for peripheral bonds is high, as evidenced by the strong syndication demand in January. Levels appear attractive, and the overall risk environment is supportive. All these factors will support peripheral spreads in Q1. Earlier arguments for a wider 10y US Treasury vs Bund spread still hold, especially following the stronger-than-expected US NFP and CPI data this month. The relative resilience of the US economy, relative inflation dynamics, and central back outlook would likely keep the widening pressure on the "Atlantic spread". We still like Sonia Dec 24 vs Dec 25 flatteners and Saron Mar vs Dec 24 flatteners. Fading the steepening of the SONIA March 24 vs December 24 curve vs EURIBOR continue to look attractive, despite the UK rates volatility this week amid stronger wage data and softer UK CPI report. Global Inflation Monday: Despite the more challenging environment for real rates, we stay long while emphasising that real rates are ideally balanced with an overweight in breakevens. For global breakevens, momentum in risk sentiment is enough to keep a long bias because breakevens tend to lag. Our main expressions are long US 5y CPI against UK RPI or on the US CPI curve against 10y.Figure 1: Summary of ViewsMarketViewExpressionUS Prefer long and steepeners but need weaker data to validate front-end OutrightNeutral but expect 10y bund yields to test 1.80% in H1 given disinflation and low growth Neutral but add if 10y bund yields rise to 2.5%CurveCurve steepeners look attractive given slowing inflation still high supply and spillovers from US rates but ECB to recalibrate reaction function slowlySteeper 10s30s curveASWHigh 2024 supply and continued ECB QT should favour tighter ASWs in the medium termShort bias Money MarketsECB will start cutting cycle in April 2024 wi...
