KBC Sunset Market Commentary 28/03/2022 via Trader Talent

• This morning, Asian bond markets were overwhelmed by a new wave of panic selling in the wake of Friday’s steep rise in US yields. In order to reinforce its commitment to decouple from broad policy normalization, the Bank of Japan under its Yield Curve Control framework made two offers to buy an unlimited amount of 10-y bonds to prevent the 10-y yield from exceeding the 25 bpn allowed deviation from the 0.0% target. The Bank will make similar buying offers over the next three days. Still 10-y Japanese yield stayed above the 0.25% level. Selling at longer maturities simply continued with the 30-y + 5.4 bps to regain the 1.0% barrier (1.026%), the highest level in more than six years. Sharply higher yields, including cycle peak levels, were also recorded in the likes of Australia (2-y 1.795%, + 21.5 bpn; 10-y, 2.90%, + 12.5 bpn). It even looked that US Treasuries would fall prey to another round of aggressive selling as markets are growing ever more convinced that bold CB action will be needed to arrest runaway inflation. US 2-y yields at some point gained another 14 bps. The 30/5-y sector even temporarily inverted, as investors feared that aggressive, frontloaded Fed action at some point inevitably will affect growth. However, selling in Asia marked some kind of ST exhaustion move. Pressure on bonds eased during the European morning session and this continued as US traders joined. Except for the 2-year (+ 3.5 bps), US bond yields even decline marginally (2-3 bps 10-y/30-y). German yields 2 & 5-year yields early in the session also touched new cycle peaks, the highest since 2014. The German 10-y yield briefly surpassed interim resistance 0.58%%. However, selling gradually faded, too. Yields currently vary between +1.6 bps (2-y) and minus 2.7 bps (30-y). Still, money markets take into account four 25 bps ECB rate hikes by this time next year. Despite the sharp swings even in the core markets, changes in peripheral spreads versus Germany remain negligeable, with Greece (7 bps) the exception to the rule. European equities weren’t unsettled by the sharp swings on bond markets, with the EuroStoxx gaining 1.50%. Is the strong dollar a help? US indices underperform (S&P unchanged). Some tentative easing was also visible in the oil market (brent $112 b/p). Also the likes of wheat, while still at elevated levels, are easing of the peak levels from earlier this month.

• Bond market volatility and a widening interest rate support simply is too striking for USD bulls to ignore. The DXY TW index (99.31) is nearing the YTD top. Policy divergency caused USD/JPY to briefly touch to 125 barrier for the first time since August 2015. However, the reversal on the bond markets finally also provided some relief for the yen (USD/JPY currently 123.75). Gains of the dollar against the euro remain modest (1.0970). Sterling failed to extend Friday’s rebound against the euro. EUR/GBP already traded with an upward bias this morning. Later, BoE’s Bailey justified the change to a softer BoE language at this month’s policy meeting referring to a potential slowdown in growth and demand. EUR/GBP is changing hands in the 0.836 area.

News Headlines

• Russian oil exports plummeted more than 25% in the week from March 17 to March 23 to an average of 3.63m barrels in daily shipments, Bloomberg reported based on industry data. The steep drop comes amid explicit embargoes from a handful of countries including the US and UK. A lot of Russia’s traditional customers and refineries are also self-sanctioning. According to Russian Deputy Prime Minister Novak, the country is still able to sell Ural crude at sharp price discounts. Earlier this month, India scooped up several millions barrels of Russian oil at a price around 20% below global benchmark prices, the Wall Street Journal reported today.

• The Czech government will sell the first local euro-denominated bond since August, the Finance Ministry’s issuance calendar for April 2022 showed. Its maturity is remarkably short (2y) given the government has shown preference for a long-term refinancing of this year’s €3.4bn euro-denominated redemptions (loans and bonds). The Ministry of Finance seeks to sell a limited 50 to 100mln euros. This compares to the CZK 19bn of domestic notes it intends to offer next month.