The US economy seems to have picked up pace again at the start of the second quarter. An acceleration in new order growth indicates strong demand for goods and services. Additionally, a surge in input price inflation – resulting from the tariff introduction which had been a key factor pushing raw material costs higher – is sending hawkish signals to policy makers. Furthermore, remarks indicating that US Treasury Secretary Mnuchin may travel to China were perceived by market participants as an indication that the US is considering a truce in its trade tensions with China. Yields on 10-year US Treasuries climbed as high as 3.0296%, their highest level since 2014 and a first tentative break of the psychological 3% level. Given that the US may have reached a late stage of the economic cycle, a sustained and sharp rise in yields seems unlikely – for the time being.
Global fixed income markets correlated positively with the US bond market ahead of this week’s ECB meeting. With regard to this meeting, we do not expect any significant changes. We also believe that the ECB will try to avoid upsetting financial markets, given the bumpy ride for yields in January and February. Thus the continuing convergence between peripherals (for example Italy, Spain) and semi-core government bonds (for example Belgium, Ireland) is expected to continue. Italy has been one of the top performers in recent weeks, as expectations for a new government are rising. There is still some way to go before an agreement is reached in Italy, but the outlook seems better than feared.
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