The global repricing of sovereign bonds continues today with core European bonds up in yield again although the moves are not at violent as earlier in the week. Currently if we look at 10-year benchmark Government bond yields they are higher than the three month average in 18 of the 20 we monitor, with only Portugal and Greece the exceptions. Indeed excluding New Zealand all 17 other markets are being priced within a few basis points off the 3 month high in yields with six markets making new 3 month highs.
So has the world economy and the outlook for growth improved that much in the last week or so? The data doesn’t reflect a dramatic improvement to warrant such a move. On inflation, there are expectations from central bankers backed by a bottoming in some series, mostly in core Europe but this is from a very low base. Also why are US Treasury yields up? The reason appears to be due to German inflation bottoming out.
So German Bunds are up 34bps in the last three months from the lows while USTs are up 28bps but the low on UST was 2.12%, and the Bund just 0.15%. Seems to us one of these markets is cheap on a relative basis and it’s not Bunds.
However, when markets get irrational all they need is the slightest reason to extend that irrationalism further. Don’t stand in front of a moving train, but if it stops at the station and on your ticket it says ‘Summer irrational discount applied’ jump aboard.’
After all that Non-Farm Payrolls for June came in at +222k against calls for 178k with a two month revision of +47k for May and April, so quite high headlines, but with the unemployment rate up at 4.4%, +0.1%, and average hourly earnings at +0.2% month on month against +0.3% expected, which is 2.5% year on year down 0.1% from expectations. Also, the participation rate was up marginally at 62.8%, from 62.7% and the average weekly hours were also up 0.1% to 34.5%. So, a rather mixed report with better inflationary indicators for bonds but a stronger headline employment picture for the bears. The US Treasury market is a little higher in yield, at the time of writing, with the 10-year benchmark up around 2bps, and credit spreads remain quite stable.