Duration continued to sell off across the developed market space last night as market participants further digest political developments in the US and Europe. Part of the selloff was probably driven by belief that the far right is unlikely to gain a majority in France at the second round of legislative elections on 7 July. Accordingly, there has been some relief with the 10Y Oat-Bund spread narrowing by some 5bps. To be sure there are still considerable stresses embedded in the spread but this is unlikely to dissipate meaningfully until the election outcome confirms a gridlocked parliament in France. More importantly, 10Y Bund yields spiked by 10bps as political risks eased somewhat. This was echoed by Gilts where markets might be getting ready for a Labour victory on 4 July.
Rising EGB yields are having spillover impact unto US Treasuries. While the shorter tenors (2Y and below) are anchored by calibrated rate cut expectations, the belly and long end yields are facing upward pressures. 10Y US yields are fast approaching 4.50%, rising from as low as 4.20% just last week. A breakdown of drivers indicates an increase in both term premium inflation expectations. Curve wise, the complacency over the last few weeks has been shaken off. 2Y/10Y spreads are now at -30bps, 20bps off the low seen last week. We are a tad cautious on steepeners in the short term, noting the speed of adjustment has been rapid. -20bps would be a key hurdle to watch.
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