Global core bonds fared very well in a session

Rates

Yesterday, global core bonds fared very well in a session devoid of major eco releases or headline news items. The Bund easily cruised past the recent record high and build out the gains throughout most of the session, before settling in a tight range, close to the new high. There were some national data from Germany, France and Italy which all fell shy of expectations, but they were second tier and not the main driver behind the rally. It was still the expectation that the ECB may take more measures, including QE, that fuelled the rally. The new Bund high stands at 151.47 for a new record low 10-yr yield of 0.899%. The German curve flattened again, with yields flat (2-yr) to 3 bps (10-yr) lower. Another well-standing trend, the bull run of peripheral bonds, continued but this time no spread narrowing with Germany. US Treasuries also traded strong with the curve sharply flatter. US yield changes ranged from about flat (2-yr) to minus 6 bps (30-yr). The 30-yr yield is nearing 3% threshold!!

Today, the focus will be on the German inflation data for August, while also Spanish & Belgian inflation data, EMU M3 money supply, the European Commission’s confidence indicators and German unemployment data will be released. In the US, jobless claims data, the second release of Q2 GDP and the pending home sales are on the agenda. Italy and the US will tap the market and EU General Affairs Ministers will start their meeting in Milan.

In Germany, HICP inflation is forecast to have stabilized at 0.8% Y/Y in August following a decline in July. Also on a monthly basis, inflation is forecast to remain flat following a 0.3% M/M increase in July. We continue to see risks for a downward surprise in German inflation as energy prices dropped significantly during the month. Following the poor PMI’s, also the European Commission’s confidence indicators are forecast to show a weakening in August. Economic confidence is forecast to drop from 102.2 to 101.5, but we believe that even a weaker outcome is not excluded. The M3 money supply and credit growth data are forecast to show a stabilization in M3 at 1.5% Y/Y in July. The lending data will probably continue to show very meagre growth in loans to households, while lending to non-financials might continue to drop. In the US, the second estimate of Q2 GDP is unlikely to show a major revision. The consensus is looking for a limited downward adjustment from 4.0% Q/Q annualized to 3.9% Q/Q annualized. A substantial downward revision related to inventories will be mostly offset by an upward adjustment in net-exports. Finally, US jobless claims are forecast to continue to hover around the 300 000 level.

The Italian treasury taps the on the run 5-yr BTP (€2-2.5B 1.50% Aug2019) and launches a new 10-yr BTP (€3.5-4B 2.5% Dec2024). Grey market trading indicates that the new BTP will come rich to the market, 13 bps more expensive than the previous 10-yr BTP (3.75% Sep2024) in ASW which corresponds with around 1 bp richer in yield terms. This factor could harm demand despite ongoing positive market sentiment versus the periphery. Italian bonds underperformed Spain of late, especially at the longer end of the curve (close to widest levels this year). This pick-up over Spain should be a supportive factor for the new 10-yr BTP. The 5-yr BTP cheapened around 6 bps in ASW spread terms going into the auction and trades normal on the curve. Additionally, the Italian debt agency will try to raise €1-1.5B by tapping a floating rate note (CCTeu). Overall, we expect plain vanilla auctions.

In the US, the Treasury continued its end-of-month refinancing operation with a good $35B 5-yr Note auction and a solid $13B 2-yr FRN auction. The 5-yr Note auction stopped right on the 1:00 PM bid side and the bid cover was in line with the average. Buyside takedown figures were quite strong, with strong direct and indirect bids. Today, a final auction is scheduled with the $29B 7-yr Note deal. Currently, the WI is trading around 2.04%.

Overnight, most Asian equity markets trade somewhat lower though there is no real driver behind the move. The US Note future continues its very modest uptrend.

Today, the eco calendar heats up. In EMU, M3 money data and EC confidence indicators are up for release. However, German inflation numbers will normally draw most attention. We see risks on the downside of expectations, which could amplify dovish expectations in the run-up to next week’s ECB meeting (Sep 04). Especially since the speech of ECB Draghi at the Jackson Hole meeting (last Friday) made clear that the likelihood of ECB QE increases. This boosted bonds further with consecutive lows for the German 10-yr yield (<0.90%). While we don’t prefer to buy Bunds at such lofty levels, the uptrend (in price terms) remains intact. Technically, the Bund is in oversold conditions though, which increases chances of a buy-the-rumour, sell-the-fact reaction (after the inflation data) or of disappointment after the ECB meeting (if the ECB doesn’t live up to high expectations). In the US, eco data are second tier and normally irrelevant to trading. Of late, a thin eco calendar didn’t stop the very long end of the US curve from rallying though. While month end buying can be one (minor) technical explanation, we thinks it’s rather strange given the US economic recovery and the Fed’s mindset. We closely monitor this evolution before drawing firm conclusions.