Global core bonds traded with a mild negative bias

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Yesterday, global core bonds traded with a mild negative bias, until the end of European trading, when fears for an escalation of the conflict between Ukraine and Russia triggered a generalized flurry of safe haven trades, pushing global core bonds higher and equities lower. Ukraine’s acting president said a military operation to wrest control in East Ukraine had begun. However, the situation calmed when the Ukraine “action” turned out to be modest and Russia didn’t immediately respond. Equities reversed course and so did US Treasuries, giving up most of the intraday gains. The 10‐yr tested the 2.6% key support level, but couldn’t sustain. By the end of dealings, US 2‐ and 5‐yr yields were little changed, while 10‐ and 30‐yr yields were 1.9 and 2.7 bps lower. German bonds closed still at the highs (new contract high) with daily yield decreases of 3 bps at the 2‐yr and slightly more than 5 bps further out the curve.

Also today, the eco calendar remains well‐filled. The first estimate of euro zone HICP inflation for March surprised on the downside of expectations, showing a slowdown from 0.7% Y/Y to 0.5% Y/Y. The final reading is forecast to confirm this outcome, but the risks if any, are for a downward surprise. In the US, housing starts and permits are forecast to show a mixed picture in March. Permits rose by 7% in February, but are forecast to have stayed broadly unchanged in April. Housing starts on the contrary were affected by poor weather conditions over the previous months, but failed to rebound in February. As weather conditions improved in March, the consensus is looking for a 7% M/M rebound in starts. Also in the US, industrial production is forecast to show another strong increase in March. The consensus is looking for an increase by 0.5% M/M, following already a 0.6% M/M rebound in February. The employment report showed a strong rebound in hours worked, but in the previous month, it was a poor precursor. Strong demand for vehicles should support activity, but we still see risks for a slightly weaker outcome.

Today, we hear from the Fed hawks, as outgoing Fed governor Stein and Dallas Fed Fisher speak. Of course, comments of Fed chairwoman Yellen at the NY Economic club may prime them all. It offers her an opportunity to dialog with markets and the public. Recently, there have been some “misunderstandings” about the Fed’s views on the timing and pace of the next rate cycle. Think about her 6 month comment at the March press conference or the confusion about the March Fed rate projections (“dots”), which shifted considerable higher versus December, and thus the Fed’s reaction function. So, Ms. Yellen may take the opportunity to give some clarifications. Finally, the Beige Book, a preparatory document for the April 30 FOMC meeting, should show that the US economy is growing moderately by low inflation.

The Germany Finanzagentur kicks off this week’s EMU bond supply by tapping the on the run 10‐yr Bund (€4B Feb2024). Total bids at the year’s previous three Bund auctions averaged €5.69B. The relatively low amount on offer and current risk averse market sentiment are supportive for the auction and should outweigh the fact that the auction yield will likely be the lowest in nearly one year. The bond didn’t cheapen going into the auction but trades with a decent pick‐up compared to other German bonds with 2022‐2024 maturities.

Overnight, Asian equity markets trade positive. WS late session rally, better Alibaba, Yahoo and Intel earnings and mixed to better Chinese eco data (GDP, retail sales, IP) supported stocks. Japanese equities outperform on the back of a weaker yen. Nikkei reports that the Japanese Cabinet office will downgrade its economic assessment in its April report (boosts stimulus hopes), though this isn’t confirmed yet by official rhetoric. The US Note future trades with a downward bias and already came off the highs yesterday. This means we could get a lower opening for the Bund.

Today, the eco calendar contains final EMU inflation data and US industrial production numbers. Of late, eco data couldn’t stir markets though. Fed Yellen talks to the economic club of NY. At her previous public address, she sounded rather dovish compared to the FOMC press conference (6‐month quote). Given the current market positioning however, it remains to be seen whether Yellen can give bonds even more impetus. Earnings results remain important as well for risk sentiment on equity markets as the latter are in the driver’s seat for trading on bond markets. Finally, also Ukraine remains a very important wildcard for trading. If tensions further weigh on risk sentiment, the downward correction on equity markets can continue.

The German 10‐yr yield closed below the lower bound of the 1.5‐1.7% trading range yesterday, which is also 62% retracement from last year’s May‐September up‐leg. That’s a very important technical signal and if the break is confirmed opens the way for lower yields. In the US, the 10‐yr yield tested the lower bound of the 2.6‐2.8% range (key support 2.45%), but (technically) more important is the 30‐yr yield. It fell below 3.5% key support (38% retracement) and could be the canary in the coalmine.