SocGen: Extension of the flight to quality
The tech rout and the second wave of French risk aversion have further extended the flight-to-quality bid for US Treasuries and Bunds. French stress is dominating EUR rates, raising the question of where the next line of defence lies. Domestic investors have provided only a limited cushion so far, leaving questions over potential support from retail investors, public-sector entities and, ultimately, the ECB. Meanwhile, a flight to USD assets or strains in cross-border USD funding could increasingly put pressure on the EUR/USD cross-currency basis. USD Rates - Rotating into Safety. Treasuries regain their haven status as AI-related concerns permeate the markets. Whether that will last remains the key question. We expect a hawkish hold at next week's FOMC meeting, as inflation remains a concern, but the pace of hikes is likely to remain gradual. EUR rates - In risk aversion mode. As the ECB steps back, private foreign investors are buying more EGBs, and they react faster to bad news. France is the most affected, because official reserve managers are also reducing their holdings. We look at who owns French, German, Italian and Spanish debt. EGBs From official to price-sensitive. As th
The tech rout and the second wave of French risk aversion have further extended the flight-to-quality bid for US Treasuries and Bunds. French stress is dominating EUR rates, raising the question of where the next line of defence lies. Domestic investors have provided only a limited cushion so far, leaving questions over potential support from retail investors, public-sector entities and, ultimately, the ECB. Meanwhile, a flight to USD assets or strains in cross-border USD funding could increasingly put pressure on the EUR/USD cross-currency basis.
USD Rates - Rotating into Safety. Treasuries regain their haven status as AI-related concerns permeate the markets. Whether that will last remains the key question. We expect a hawkish hold at next week's FOMC meeting, as inflation remains a concern, but the pace of hikes is likely to remain gradual.
EUR rates - In risk aversion mode. As the ECB steps back, private foreign investors are buying more EGBs, and they react faster to bad news. France is the most affected, because official reserve managers are also reducing their holdings. We look at who owns French, German, Italian and Spanish debt.
EGBs From official to price-sensitive. As the ECB steps back, price-sensitive private capital is driving a massive rotation in European bond ownership. Germany retains its stable official anchor, but France is increasingly reliant on global investors while Italy and Spain lean on Euro-area support. GBP rates - Tightening in focus, Budget in check.
The case for BoE hikes is strengthening, although market pricing still exceeds our adverse scenario. Risks from the Budget announcement next week look contained. Japan - Flattening bias intact. Risk-off sentiment and strong long-end demand support further JGB curve flattening, while rising inflation pressure keeps the BoJ in play.
We maintain paid 1y1y TONA and JGB 10s30s flatteners Societe Generale