Strategy Daily

Evelyne Gomez-Liechti | Multi-Asset Strategist (Mizuho International Plc) |

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USD rates rally running out of steam, but what about the steepening? The softer US retail sales print initially gave the front-end another reason to rally, but the move did not hold. USD rates followed Europe into a bear- steepening move, with 10Y UST yields back near 4.70% and the curve again testing the idea that the front-end can be capped by softer data, while the long-end remains exposed to fiscal, supply and energy risk. Expectations of an earlier late summer supply push plus still large AI-driven funding needs may be behind the steepening seen on Friday (especially in EUR rates). Macro-wise, besides Friday’s flash PMIs, this week’s FOMC minutes will likely be a focus point. We’ve received another round of data since the July Fed meeting. So, while the minutes may still read hawkish, the market will likely treat them as stale unless August inflation reopens the discussion. We are still on the December hike camp, which could potentially see markets push further out part of the 7bp priced for September to the October/December FOMCs. Today is the 60-day US-Iran MoU deadline, with no clear sign yet that either side is ready to extend the process. Bessent’s “economic isolation” comments keep the tail risk alive. That said, Brent has so far stayed contained in the $88-89.5pb range, so for rates this is still more a headline-risk premium than a fresh oil impulse. The risk is that the market keeps fading oil until physical disruption forces it not to.

EUR rates ended last week with a very strong bear-steepening theme. There was no single macro catalyst to explain the long-end weakness and the swap spread cheapening besides perhaps a renewed focus on fiscal/ supply as September gets closer. That makes it harder to fade the steepening immediately, even if outright levels are starting to look stretched again. 10Y Bund yields are back at the top of the recent range, and it will be interesting to see whether buyers are willing to re-enter. The OAT underperformance is probably the other key story to watch. France widened again versus Germany and Italy on Friday, and with OAT supply due this week, it feels like the market wants a concession unless real money or Asian demand steps in around these levels. The next proper macro check is Friday’s flash PMIs. Until then, EUR rates are probably more exposed to flow, oil and supply than to ECB pricing. Front-end pricing should stay relatively well anchored, but the longer-end still looks vulnerable if global curves keep steepening.

Key week ahead for GBP rates with labour market data on Tuesday, CPI on Wednesday, then retail sales and public finances on Friday. For the front-end, wages and services CPI are still the key inputs. A softer labour market and further moderation in pay growth would support the idea that the BoE can stay patient rather than reprice hikes. But the market will be less forgiving if CPI re-accelerates via energy or services, especially with UK fiscal credibility still in the background. 1y1y SONIA OIS is pricing ~ 60bp of hikes this cycle. If the data is weak, we see room for this pricing to move below 50bp. Meanwhile, GBP duration tagged along the EUR-driven steepening and 10Y Gilt yields pushed through the key 5% level that has been respected in the past. Softer data this week may be enough to see dip-buyers emerge, although politics and fiscal remain a key question mark.

Generally better open for Asian equities, with tech stocks leading the move higher. In Japan, GDP was weaker than expected (annualised SA GDP at 1.1%QoQ vs 2% cons.) but that didn’t stop JGB yields from rising. The curve steepened into the ultra-long end, in sync with the moves seen in DM rates last Friday and possibly pricing some concession into this week’s ultra long supply.

Multi-Asset Strategy Daily Mizuho International Plc 1

This publication has been prepared by Mizuho International plc’s Fixed Income Sales & Trading department and represents the views of Mizuho International plc…