SGOV - Rates Spark: Euro Rates Eyeing Quicker ECB Cuts

2024-07-26 05:30:00 ET

Summary

• We saw a change in tone in the US as yields reverted higher, but a decent 7yr auction settled things down. It’s all about the PCE deflator now.
• The risk for bond bulls is a 0.3% on the core reading. We think 0.2%, but there’s the risk.
• Markets see more ECB rate cuts in the near term and the back end of euro rates remains well-anchored, adding to the steepening.

By Padhraic Garvey, CFA , Benjamin Schroeder , and Michiel Tukker

Relief trade through US hours Thursday, but underlying risks remain

The US saw a decent 7yr auction on Thursday. There was a strong indirect bid, and it came through the when-issued yield by almost half a basis point. This was a relief for those playing Treasuries from the long side, as it's been a day of reversal for the most part. Thursday’s US data was net bearish for Treasuries, and helped to change the narrative on the week, even as it followed another drop in the German Ifo index. The market also reverted to a more risk-on mode, at least during US hours. Volatility came off the highs too....

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