Core bonds barely move in quiet summer trading

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Yesterday was probably one of the most boring trading sessions in the core bond markets this summer despite some interesting eco data and events.
Investors are apparently unwilling to take positions ahead of the Jackson Hole speech of Yellen on Friday. In a daily perspective, German and US yields were less than 1 basis point higher/lower across the curve. European equities traded strong and US ones started strong, tested the highs, but slid lower for the remainder of the day. Oil jumped higher in late European trading (see headlines), but stabilized and didn’t materially affect core bonds. Eco data were mixed: EMU consumer confidence unexpectedly weakened in August, while in the US New Home sales were much stronger than expected in July at multi-year high, but both the Richmond Fed manufacturing survey as the Markit PMI were a good deal weaker than expected. Market reactions: none. The US 2-year Note auction went very well. Finally, the Minutes of the US Fed discount meeting (July 25) showed that 8 out of 12 regional governors asked for a discount rate hike. In June there were six requests. ECB Coeuré said that the lack of structural reforms or fiscal initiatives may force the ECB to act despite risks. In intra-EMU bond markets, modest profit taking continued with 10-year yield differentials up 1 to 2 bps.

Unenticing market calendar

After having increased for four consecutive months, US existing home sales are forecast to have dropped slightly in July, by 1.3% M/M to a total number of 5.50 million. Following strong sales in the previous months, we believe that a limited dip is likely, although the trend will remain positive. FHFA house prices are still June data, so quite outdated. The consensus is looking for an increase by 0.3% M/M, up from 0.2% M/M in May, but we see risks for a stronger increase spurred by increasing activity.

Bund and US 5-year Note auctions

The Treasury started its end-of-month financing operation with a stellar 2-year Note auction. The auction stopped (0.76%) a full basis point below the WI at the moment of the stop (80% allocation at the high yield). The bid/cover of 2.83 was above average (awful 2.52 last month) and the buy-side takedown was very well, especially the direct bidding. This bodes well for today’s 5-year Note auction. The issue is currently trading at 1.135%. The auction will pay-down about $1B taking into account a $35B maturing issue.

The German debt Agency will tap the 0% Oct2021 for an amount of €4B. It is the first re-opening after it sold €5B of the new issue in July. At the initial auction, the average yield was 0.51% and the official bid/cover 1, after the Bundesbank retained about 1.614B for its market regulation. Currently the bond yields -0.523%, not far away from the yield at auction. Positively, there is currently little fresh supply, but on the other hand many investors may be not active. So, while the issue may again be undersubscribed, it shouldn’t as usual have little impact on the secondary market.

More range-trading ahead of Yellen?

Overnight, Asian equity markets trade again mixed. Japanese equities are doing well while Chinese equities trade weaker and the other marginally stronger. The dollar is little changed and so are US Treasuries. This suggests a fairly neutral opening of core bonds. European equities may still open somewhat lower on the slide of US equities after the European closure.

Today’s eco calendar is thin and unattractive. No eco data in EMU and only existing Home sales, no strong market mover, in the US. The Bund and 5-year T-Note auctions are interesting, but unlikely to trigger much follow up action. That didn’t even happen yesterday when there were some interesting items. In this context, we expect technically inspired sideways trading today and probably even into Yellen’s speech on Friday. Traders may look intraday for impetus to the equity and oil markets, but also these may be range-bound. On top of it, the correlation between these markets and bonds diminished sharply. Technically, the T-Note future rebounded when approaching key support (131-19+), suggesting that it needs a strong driver to break eventually, which is not on today’s radar. The Bund is moving nicely in its 200 ticks sideways range with 168 first resistance that may invite some traders to go short. Longer term, the range has boundaries between 168.86 and 165.63.

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