Yesterday, European bond markets remained closed

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Yesterday, European bond markets remained closed, but US ones resumed trading. Thinness of trading was the most remarkable thing to report though. There were no eco releases of interest and no other main headline news.
Traders digested Thursday’s substantial losses, but a shy attempt to push Treasuries below Thursday’s lows never went far. Treasuries finished the quiet Monday with marginal gains, the belly of the curve slightly outperforming. Yield changes ranged from - 0.5 bps to - 1.5 bps.

Today, the eco calendar is enticing with the first estimate of European Commission’s consumer confidence, the Richmond Fed index and US existing home sales. On the supply front, Holland (DSL), Belgium (OLO) and the US (2Yr Notes) will tap the market.

In March, European Commission’s consumer confidence showed a sharp rebound, rising from -12.7 to -9.3, the highest level since 2007. For April, the consensus is looking for a stabilization. We believe however that the risks are for a weaker outcome as Belgian consumer confidence weakened and the euro area reading is already above its long-term average. In the US, the Richmond Fed index failed to rebound in March. The headline index even weakened slightly, from -6 to -7. For April, the consensus is looking for an improvement to 2. We believe that the risks are for an ward surprise. Finally, US existing home sales are forecast to remain poor in March, despite slightly more favourable weather conditions. Existing home sales have weakened since the middle of last year as tight inventories weighed on sales. Recently however inventories have picked up slightly, which is a positive sign heading into the spring selling season. For March, the consensus is looking for a limited drop by 1.1% M/M to 4.55 million. We hope to see a slightly stronger outcome supported by improving weather conditions in several regions.

The Belgian debt agency taps the off the run 10-yr OLO 55 (4% Sep2017), the on the run 10-yr OLO 72 (2.6% Jun2024) and the off the run 30-yr OLO 44 (5% Mar2035) for a combined amount of €2-2.5B. The amount on offer is relatively low, but this is no issue for the debt agency as they are in a favourable funding position with around 50% of this year’s funding needs already covered. With the low amount, they also play it safe as some investors might shun the auction with next month’s elections in mind. The taps of the off the run OLO’s are likely on specific demand, which should guarantee bids. The 10-yr OLO 72 didn’t cheapen going into the auction, but still trades relatively cheap on the 10-yr sector of the OLO curve, which could support demand. Also versus other semi-core countries, Belgian bonds still offer some pick-up (eg +- 10 bps in ASW spread terms versus France). In the US, the treasury starts its end-of-month refinancing operation with a $32B 2-yr Note auction. Currently, the WI is trading around 0.44%. The auction is followed by a $35B 5-yr Note auction tomorrow and a $29B 7-yr Note auction on Thursday.

Overnight, Asian equity markets trade mixed with China and Japan underperforming. The US Note future has a small upward bias. Yesterday, Russian foreign minister Lavrov stepped up rhetoric on a possible intervention in eastern Ukraine. If this pulls equities lower at the start of trading, bonds could get some support.

Today, the eco calendar contains only Richmond Fed Index and EMU consumer confidence. Last week, very strong (US) eco data were largely ignored. Later this week, this could change with the more important EMU PMI’s and US durable goods. Earnings results and tensions in Ukraine are important for risk sentiment on equity markets as the latter were in the driver’s seat for trading on bond markets last week. Technical elements should be considered as well. The technical picture of the German 10-yr yield remains fragile though we closed again north of 1.50% support on Thursday. In the US, the test of the downside of the sideway range between 2.6% and 2.8% failed and we’re comfortably back in the middle of that channel. Overall, we have no strong view for today, though we don’t anticipate a clean break below 1.50%.