GLOBAL  ECONOMY: On Monday, August 7,  borrowing costs within the euro-zone exhibited a mixed trend. Traders kept a close eye on the movements of U.S. Treasuries, even as they factored in the likelihood of the euro area's tightening cycle coming to an end by year-end or possibly even earlier.

According to analysts, the selloff in U.S. Treasuries subsided following the release of mixed jobs data on Friday. However, the Treasury supply set to hit the market during the current week could exert upward pressure on rates. As a reminder, bond yields move inversely with prices. Additionally, Fitch downgraded the United States' credit rating, and in response to a growing deficit and the need to balance its overall debt profile, the Treasury Department announced an offering of $103 billion in Treasuries.

Investors are anticipating that euro area core rates will remain partially shielded from global spillovers, especially considering the European Central Bank's waning hawkish stance and the still-mixed data picture. Germany's 10-year government bond yields, which serve as the euro area's benchmark, witnessed a one basis point (bp) increase, reaching 2.55%. Over the recent period, they fluctuated between 2.28% and 2.68%, starting from July 10.

Towards the end of the previous month, hawkish ECB officials, including Dutch central bank chief Klaas Knot, expressed the view that a rate hike in September might not be necessary. Money markets, on the other hand, indicate a 60% likelihood of another 25 bps rate hike by year-end, and less than a 50% probability of the same move occurring in September. Notably, December 2023 ECB euro short-term rate forwards stood at 3.8%, implying market expectations for a depo rate at 3.9% by year-end.

At present, the depo rate is set at 3.75%. In Germany, 2-year yields experienced a decline of 4 bps, settling at 3.12%.

U.S. yields saw an increase of 3-4 bps after falling by more than 10 bps on Friday. Although the U.S. economy added fewer jobs than expected in July, it showed robust wage gains and a decline in the unemployment rate, indicating sustained tightness in the labor market.

Despite the initial market reaction, some analysts maintain that the mixed nature of the jobs report did not alter their view of the Federal Reserve's tightening trajectory. The Bundesbank's announcement on Friday to halt remunerating deposits for the German public sector starting October might prompt investors to rush into short-dated bonds.

Michael Leister, head of interest rates strategy at Commerzbank, stated, "A BuBill run cannot be excluded, and scarcity speculation looks set to intensify further in the coming months." He also added, "Particularly, the Finanzagentur should continue to provide sufficient collateral to the market and stand ready to counter disruptive scarcity if needed."

As for Germany's 1-year yields, they dropped 0.5 bps to 3.64%. Investors will closely scrutinize U.S. inflation data scheduled for later this week, seeking fresh clues about the Federal Reserve's future moves.

BofA's research note suggested that the "July CPI report will likely be another soft report and point to moderation." It forecasted "a strong" 0.1% month-on-month and a decline in the yearly rate to 4.6%, marking the lowest level since September 2021.

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