Global Interest Rates after the US elections

Markets digest Trump victory. Maybe it was the abrupt turnaround in rhetoric by President-elect Trump, maybe it was the learning experience from the UK Brexit vote. But yesterday’s bond market response to the US election outcome wrong-footed many pundits including us. After initially rallying, as widely anticipated, 10yr UST yields actually ended the day 20bp higher at a 11-month high of 2.06%. 30yr rates sold-off even more sharply (i.e. 23bp), with 30yr swap spreads temporary dipping below -60bp. Clearly, markets speedily shifted their attention to the implications for growth and inflation of Mr Trump’s fiscal policies (we note that USD 5y*5y inflation surged more than 15bp). However, we fear markets may have run a bit ahead of themselves and doubt whether the 10-year’s 2% handle can be sustained in coming weeks and months in the wake of ongoing QE in the UK, Japan and the Eurozone. In any case, the flight to safety theme was more prevalent in the Eurozone, where 10yr Bund yields nudged ‘only’ 1.5bp higher and intra-EMU spreads came under broad-based widening pressure, although 10yr BTP/Bund spread eventually closed just 2bp higher. It goes without saying that the market’s focus on the referenda and elections that will grip Europe over the next 12 months will only increase – as already evident in the underperformance of longer-end OATs yesterday.

EGB supply. No supply is scheduled for today, but tomorrow Italy will tap four lines: the on-the-runs BTP 10/19 (€2.25-2.75bn), BTP 10/23 (€1.75-2.25bn) and BTP 3/47 (€0.75- 1.5bn), plus the off-the-run BTP 9/40 (€0.5-0.75bn). BTPs currently carry a substantial political risk premium. This is illustrated by the recent decoupling of the 10yr BTP/Bund spread from the Itraxx senior financials which it used to track rather closely year to date. It will be the first tap of the 3yr BTP, which trades at a roll of 7bp versus its predecessor 4/19. Given the steepness of the curve the 7yr bond may look more appealing with the (generic) 3-7yr curve at its steepest in a year. While 10-30yr is also revisiting the upper end of its 12-mth range, the BTP 3/47 does trade close to the tightest level versus the 9/46. But of the bonds on offer, only the 3/47 traded special in repo in the past few days.