Market Wrap – European Bond Market Focus

The Germany’s long-dated government bond yields edged higher as investors uncertain about the ongoing energy crisis and the European Central Bank’s next moves.

The markets expectations for a massive interest rate increase by the ECB eased has also eased, following media reports that policymakers are considering a smaller hike.

Those reports sent the EURUSD pair to a fresh 20-year low, additionally, the bond market is also spooking traders as the fear European government will foot the bill for the ongoing price rises in European energy.

Credit Suisse said that the EUR/USD technical outlook and maintains a bearish bias in the near-term. Their analysts note that that a price drop under 0.9900 is very bearish. I tend to agree.

The Credit Suisse team note the “EURUSD has begun the week undergoing a concerted attempt to remove key support from the 78.6% retracement of the 2000/2008 bull trend at .9900 as energy supply pressures in Europe deteriorate further.”

Additionally “We maintain our core bearish outlook and we look for a sustained break in due course, with support seen next at .9862, ahead of .9729/25 and then the lower end of the downtrend.”

German yields were down between 6 and 20 basis points in today’s the session. Short-dated borrowing costs, more sensitive to ECB rate hikes, kept falling across the euro area, with Germany’s 2-year yield down 7 bps to 1.095%.

US borrowing also costs jumped to their highest since June 21 today, providing more pressure on euro zone yields. The US 10-year yield rose 13 bps to 3.32%.

Bond yields have been very volatile in recent weeks. They had jumped on Monday, led by a rise in the Italian 10-yield towards 4%, after Russia’s decision to keep its main gas pipeline to Germany.

Gilts are particularly instructive because aside from this, as new UK PM Liz Truss is also promising to lower corporate taxes. Today alone, gilt yields are up 19 basis points and have broken the 2014 to the highest levels since 2011.

The UK100 and sterling both traded in mild positive territory due to the notion that Truss is a safe pair of hands and the political chaos in Westminster may soon stop.

Elsewhere, precious metals continued to take a hammering, with the price of gold, silver, and copper all down by over 0.50 percent intraday due to the rising US dollar.