Good morning from Copenhagen!

What a rollercoaster over the past 24 hours. Markets initially liked the message from UKs autumn budget until it suddenly became apparent that £30bn was added in “unfunded spending”. This is probably an early hint of what to expect should Trump communicate that he intends to run the US economy on fumes during his presidency. Maybe central banks need to get involved to calm down term premias as they did a year ago? 

On top of that, ECBs Schnabel said yesterday that the ECB does not need to go below neutral rates, which caused a major reaction in front-end EUR rates. Fortunately, we’re not involved at the front end of the EUR curve, but the reaction to Schnabel’s comments feels overblown. We’re already pricing about 75 bps above neutral, so why the response to her simply suggesting we don’t need to go below? Market participants aren’t positioned for that in any case.

Under the surface, we’re seeing a growing disconnect between bond yields and inflation developments, something that has occurred a couple of times over the past year. The first instance was around the October supply/term-premia scare last year, and the second was during the initial exchange of rockets between Iran and Israel. Both situations ended poorly for fixed-income bears, and we expect a similar outcome this time. However, we acknowledge that it will be a bumpy ride in this trade until next week’s election.

Chart 1a: Euribor pricing versus equilibrium/neutral rates