Below we reproduce one section of our Fixed Income Weekly — a report we update every Wednesday to Bespoke Institutional subscribers covering domestic and international interest rate, credit, and other fixed income-related subjects. Each week we include commentary on a variety of yield curves, including USTs, German bunds, Eurodollars, inflation, and the Bespoke Global Yield Curve, a composite nominal interest rate measure of the 15 largest global economies.
Curve flattening continues, with swaps curve starting to invert in some cases. We discussed that phenomenon in The Closer on Tuesday (link). 10s30s is the most likely to invert, but 5s10s is also very close to inverting as well. The front end of the curve is relatively stable (15 bps range since the start of June).
The persistent decline in German yields over the past 5 months (from over 75 bps at the start of February to sub-30 bps earlier this week) has helped dramatically flatten the Euro curve, which hit 52-week lows this week in lock-step with the US yield curve. Sovereign bonds have been better behaved of late.
As discussed in The Closer last night (link), the Eurodollar curve has flattened. That said, it’s a kink in the curve as opposed to an overall flattening with lower yields in out years. Still, that inversion is not a good sign as a reflection of market expectations for the future of the Fed hiking cycle or the economic expansion.
Yesterday’s PPI report came in pretty hot, with PPI Final Demand, Ex Food & Energy, and Ex Food, Energy, & Trade Services all beating expectations. Ex Food & Energy hit the highest level since 2011 on a YoY basis. That bodes well for the overall trend in inflation, and is also a reflection of both tightening labor markets and the impacts of tariffs on intermediate and final goods.
With both US and Euro curves flattening dramatically, the Bespoke Global Yield Curve has made new flats over the last few weeks. That’s despite a topping out of the short end of the curve, which had been rising inexorably thanks to the combination of Fed tightening and emerging market central bank hikes in response to currency weakness across the space.
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