The German Finanzagentur taps the on the run 2-yr Schatz

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Yesterday, global core bonds continue hovering in a sideways tight range near the post-payrolls high. German Bund yields ended between 0.4 and 2.1 bps higher. Late in the US session, Treasuries managed to eke out some, albeit modest gains, leaving US yields up to 1.9 bps lower in the close, the shorter end lagging (auction-related?). A stronger NFIB indicator was ignored, as were some renewed geopolitical tensions in Ukraine and ECB/FED comments (see below). The US 3-yr Note auction was solid but didn’t impact the market.

The eco calendar remains razor-thin with only the Greek industrial production data. After a dip in January, it will be interesting to see whether Greek production will resume its rebound. The Swedish Riksbank will decide on rates, ECB’s Coeure & Lautenschlaeger and Fed’s Evans (again) are scheduled to speak and the Fed will release the minutes of its latest FOMC meeting. Germany (Schatz), Switzerland (Bond) and the US (10Yr Notes) will tap the market.

ECB Weidmann said that the risk of a deflation spiral is low, as the recovery in the periphery should push inflation higher and as a large part of the disinflation was due to falling energy prices. He added though that the ECB is ready to act if the period of too low inflation continues for too long. Comments were in line with previous ones and suggest that Weidmann doesn’t feel the need to act soon. ECB Noyer said that the euro is too strong due to returning investors from outside the EMU, not because of monetary policy as the French PM said. He repeated the ECB mantra that low inflation is a problem if it persists.

Fed governors Kocherlakota and Evans, both outspoken doves, highlighted risks of low inflation. The former called for more rapid steps to get inflation back to 2% (lowering interest rate on excess reserves, not more QE), while the latter warned not to withdraw stimulus too quickly. Fed Plosser, an outspoken hawk said low inflation was transitory, but added that the Fed was not even close to withdraw stimulus prematurely. The timing of the first rate hike would depend from the data, inflation and employment goals. All in all, well known positions, even if Plossers’ statement on the Fed not close to withdrawing stimulus should ease market concerns about a sooner rather than later withdrawal of stimulus. The FOMC Minutes, released this evening will be scrutinized on this point. With her comments that the Fed might raise rates 6 months after stopping asset buying, thus in spring 2015, chairwoman Yellen stimulated thinking about a Fed moving faster on rates than previously thought. We think Yellen’s comments won’t be found in the Minutes, which might be bond positive.

The German Finanzagentur taps the on the run 2-yr Schatz (€4B 0.25% Mar2016). Total bids at this year’s previous three Schatz auctions averaged €8.39B, so we don’t expect difficulties at all for this relatively small auction. On a micro-level, the bond cheapened around 1 bp in ASW spread terms over the past week. After this auction, the Germany will have completed 30% of this year’s expected issuance.

In the US, the treasury started its mid-month refinancing operation with a solid $30B 3-yr Note auction. The auction stopped right on the 1:00 PM bid side with a good bid cover (3.36 versus 3.28 average over the past year). The bidding details were mixed. An aggressive direct bid counteracted a weak indirect bid. Today, the treasury continues with a $21B 10-yr Note auction. Currently, the WI is trading around 2.695%.

Overnight, Asian equity indices trade modestly positive on the back of better WS session. Japanese stocks are huge underperformers with losses in excess of 2%. This has much to do with the impressive yen rally yesterday. The US Note future trades with a very small downward bias this morning. Alcoa kicked off earning season. Excluding restructuring charges, the company reported a profit of 9 cents a share, topping the Street consensus of 5 cents a share.

Today, the eco calendar is even thinner as the past two days and attention will uniquely go to central bankers. ECB Coeure and Fed Evans speak, but we’ve read their comments yesterday and we don’t expect them to change minds overnight. The key release will be the FOMC Minutes after the European close. These could be less hawkish than Yellen’s press conference and slightly positive for bonds. Tensions in Ukraine remain a wildcard via risk sentiment on equity markets.

Technically, the US 10-yr yield failed to break north of 2.80% after the in line with consensus payrolls. Given the relative thinness of the agenda this week, we believe the US 10-yr yield will remain in the 2.6-2.8% trading range, perhaps even until the next payrolls early May. For the German 10-yr yield, this trading range is between 1.5-1.7%. In the short term, the downside might be under pressure if the ECB QE debate intensifies.