Rates spark little respite ahead of a busy week

Key arguments

• The US 10yr yield overshoot toward 5.25-5.5% remains ongoing, driven predominantly by higher real yields rather than inflation expectations, which are contained.
• Weak 5yr and 7yr Treasury auctions prompted a follow-through rise in yields, with the 10yr breaking above 5.1% and approaching 5.2%.
• Long-end bonds remain exposed to upward pressure from pure debt dynamics, implying potential re-widening of swap spreads, especially in the 10yr area.
• A full 100bp of ECB tightening priced over the next year appears ambitious given uncertainty, though the ECB acknowledges the adverse energy market scenario amid macro resilience.

Corresponding source evidence

1. The front end paused after valuations looked stretched, but resilient macro data, elevated energy prices and inflation pressures generally continue to pressure yields higher Bearish sentiment continues for long-end bonds The rate hike discount looks extreme, but long bond yields can remain under pressure The US 7yr auction tailed moderately.
2. Which is important, as this is not shielded by the Fed hiking rates, which could be the case if we had an inflation expectations issue.
3. Thursday saw US$4.1bn bought back in the latest reverse auction, but we're not of the opinion that the market should be overly concerned with this, in the sense that it's not a negative.