Global core bonds parted ways yesterday

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Global core bonds parted ways yesterday. The German Bund, which was in overbought conditions, ended lower whereas the US Note future eked out some gains. Initially, small constructive steps on the geopolitical scene pushed core bonds lower. Lower US core CPI erased all losses for the US Note future and a stronger Richmond Fed Index and existing home sales couldn’t trigger a complete new turnaround. Towards the end of trading, bonds found a better bid again as US authorities halted all American flights to Israel’s main international airport. At the end of the day, the German yield curve bear steepened with yields 0.8 bps (2-yr) to 2.4 bps (30-yr) higher. Changes on the US yield curve range between -0.6 bps (30-yr) and -2.3 bps (5-yr).

On intra-EMU bond markets, 10-yr yield spread changes versus Germany were small, ranging between -2 bps and +2 bps. Belgian bonds were unaffected by the formation of a Flemish government coalition between N-VA, CD&V and OpenVLD. The three parties also sealed their faith for a federal government which paves the way for federal coalition talks with French speaking liberals of MR. After European trading, CD&V Peeters and MR Michel got a joint mandate from the royal palace on forming a federal coalition. Today, the eco calendar is thin with only the first estimate of European Commission’s consumer confidence for July and the first quarter EMU government deficit data. The Bank of England will publish the minutes of its latest MPC meeting and BoE’s Carney is scheduled to speak.

In June, European Commission’s consumer confidence weakened unexpectedly, from -7.1 to -7.5. Following the limited drop, the consensus is looking for a stabilization at -7.5 in July. We believe however that the risks remain for a weaker outcome as increased geopolitical tensions might weigh on sentiment together with the disappointingly slow economic recovery. The Q1 government deficit data will be interesting, but are already outdated and therefore less interesting for markets.

Overnight, Asian equity markets trade positive with a Japanese underperformance. Apple results, published after US close, were plain vanilla. On the geopolitical scene, the situation didn’t escalate nor de-escalate following the international flight ban to Israel. The US Note future trades flat overnight, giving no indication for the start of Bund trading.

Today, the eco calendar is thin with only EC Consumer confidence. Risks are for a weaker outcome, which could be marginally supportive for bonds. However, while the picture remains bullish for bonds, technical elements might cap core bond gains and limit a decline of yields. The German 10-yr yield remains close to the record low (1.12%) and also for US yields there are quite some red flags. The US 10-yr yield approaches 2.46%/2.4% support and the 30-yr yield already tested 3.24%. The environment of weaker eco data and low inflation keeps the hope on ECB QE alive and supports Bund bulls. Geopolitical stress adds to the argument. In this context we cannot be negative for Bunds, even if we think Bunds are too expensive and the distance with the all-time lows too small to set up additional long positions.