The RBNZ raised its key interest rate to 2.75%

Rates

Global core bond mainly profited from safe haven flows yesterday. Chinese credit concerns, geopolitical tensions, weaker EMU IP data and a strong US 10-yr Note auction completed the picture. At the end of the session, the German yield curve shifted up to 4.2 bps lower, the belly of the curve outperforming.
The picture in the US is more or less similar with the 10-yr yield 3.8 bps lower. European equities tanked whereas the euro and US equities remained remarkably resilient. Peripheral yield spreads widened up to 7 bps, with Greece and Portugal underperforming (+15 bps).

Today, the eco calendar heats up, especially in the US with the retail sales and jobless claims data, while also the French HICP inflation data will be interesting. The ECB will publish its monthly bulletin and Italy, Ireland and the US will tap the market. ECB Coeure speaks in Paris after saying yesterday that deflation is a possible risk and ECB Draghi talks after the European market close.

Following two consecutive monthly declines, US retail sales are forecast to have picked up slightly in February. The consensus is looking for an increase by 0.2% M/M following a 0.4% M/M decline in January. We believe that the risks are for a slight upward surprise. Vehicle sales picked up during the month and we believe that also other sales might have increased somewhat following soft data in the previous two months. Nevertheless, any increase will probably be very limited due to poor weather conditions. The control group is forecast to show an increase by 0.2% M/M. Also in the US, initial jobless claims are forecast to have picked up from 323 000 to 330 000 in the week ending the 8th of March. We believe however that the claims might come out somewhat lower as effects from the unusual weather conditions should start to fade. We believe that claims are still somewhat above their underlying trend due to weather conditions and as a result, there is downside potential once weather conditions are improving again.

Tthe Italian debt agency taps the on the run 3-yr BTP (€3-3.5B 1.5% Dec2016), 7-yr BTP (€1.5-2B 3.75% May2021), 15-yr BTP (€1-1.5B 4.75% Sep2028) and the off the run 30-yr BTP (€0.5-0.75B 4% Feb2037). Yesterday’s risk-off trading session led to a 5 bps underperformance/cheapening of Italian BTP’s versus swap. Of late, Italy also underperformed versus Spain whereas news flow is positive (eg Renzi’s political reform). On a micro-level, we think that the May2021 trades cheap compared to surrounding bonds, whereas the Feb2037 BTP is the most expensive one at the very long end of the curve (tap most likely on specific dealer demand). The Irish treasury taps the on the run 10-yr IGB (3.4% Mar2024). It’s the first regular tap auction since 2010. The bond cheapened some 3 bps going into the auction and underperformed surrounding Irish bonds. All in all, sentiment towards the periphery remains strong and will support both auctions. In the US, the treasury continued its mid-month refinancing operation with a strong $21B 10-yr Note auction. The auction stopped firmly through the 1:00 PM bid side with a strong bid cover (2.92 vs2.68 average over the past year). The buy side demand was good as well, with an unusually aggressive direct bid. Today, the treasury ends its refunding with a $13B 30-yr Bond auction. Currently, the WI is trading around 3.68%.

Overnight, Asian equity indices trade mostly positive with a Japanese underperformance. The RBNZ raised its key interest rate to 2.75%, while Chinese retail sales and production data disappointed. The latter where released just before the end of the Asian trading and weighed on the market into the close. The US Note future felt little to no impact though, but a minor higher opening of the Bund is not excluded.

Today we finally get an important economic number with US retail sales. We see risks for a better outcome and hope to see our view confirmed that stronger US eco releases weigh on core bonds (cfr. Payrolls last week). In that case, the US Note future might go for a second test of 123-15+/10+ support (2.78% in yield terms). The German Bund future outperformed of late and is now again closer to the upper bound of the recent trading range.
Yesterday’s trading showed the Bund remains sensitive to geopolitical and Chinese concerns via sentiment on equity markets. That remains a wildcard for today. Nevertheless, given the outcome of last week’s ECB meeting, we believe the upside is blocked and eventually eye for a return towards 141.20 (downside recent range).