Societe Generale’s Kenneth Broux reports that Bunds and Bonos have retraced from recent yield highs, despite a strong upside surprise in Spain’s CPI data [1]. The bank cautions that if this inflation pattern is replicated across the Euro area, there is a risk of an upside surprise in core HICP, with Societe Generale forecasting no change at 2.4% year-on-year for tomorrow’s release [1].
The current short-covering in Bunds and the dip in yields across the European Government Bond (EGB) curve are described as tentative and potentially shallow, with the possibility of reversal [1]. For Bund yields specifically, Societe Generale identifies topside resistance levels at 3.70% and 3.74%, and support at 3.54% [1].
The bank’s economist, Sam Cartwright, emphasizes that if the inflation trend seen in Spain is mirrored across the euro area, the risk profile for core HICP could shift towards an upside surprise, which may impact market expectations and bond yields [1].
Overall, the market reaction to the yield dip is seen as cautious, with Societe Generale suggesting that German yields may resume their upward push if inflation risks materialize [1].
CONCLUSION
Bund yields have dipped on tentative short-covering, but Societe Generale warns this move may be shallow and subject to reversal. Upside inflation risks, particularly if Spain’s CPI surprise is replicated across the euro area, could drive yields higher and impact core HICP expectations. Market participants should remain alert to tomorrow’s euro area inflation data for further direction.