Rates spark volatility is no friend of spreads

Key arguments

• Elevated global rates volatility is keeping EGB spreads under pressure, and European politicians alone cannot tighten them.
• The US 10-year Treasury yield passing 5% lifted US implied volatility, which is a key driver of euro rate volatility, meaning Europe alone lacks tools to return spreads to earlier lows.
• A common global driver explains why Italian government bonds sold off similarly to French government bonds.
• Rate volatility is expected to remain elevated for coming months, with inflation uncertainty the biggest unknown.

Corresponding source evidence

1. With inflation uncertainty likely to persist, a return to the low-volatility conditions that previously supported carry trades and tighter spreads looks unlikely With inflation uncertainty likely to persist, we don't expect a return to low-volatility conditions Politicians alone cannot tighten EGB spreads European government bond (EGB) spreads will need more than political willpower to tighten.
2. Inflation continues to be the biggest unknown and will be an important determinant for the next move in rates.
3. But markets and central banks will need additional data to become more confident about inflation dynamics.