The German Finanzagentur taps the on the run 30-yr Bund

Rates

On Tuesday, core bonds lost only modest ground in another data-poor session, which was dominated by surging equities. Equities profited fully of the return of the risk-on sentiment to the marketplace. Rumours that the ECB will soon contemplate buying corporate bonds was the trigger. In a daily perspective , German yields are 1.2 to 3.1 bps higher, while US ones rose 1.4 to 2.2 bps. The US curve steepened marginally, while in Germany the curve steepened up to the 10-yr sector. Peripheral bonds remained volatile, but this time, 10-yr yield spreads narrowed substantially. Also semi-core and non-German core bonds outperformed German ones. The corporate bond buying rumour is mainly beneficial for peripheral countries. Ireland underperformed on expectations of additional supply in the near term.

Today, the focus will be on the US CPI inflation data, while in the euro zone, the eco calendar is empty. The Bank of Canada will decide on rates and Germany (Bund) will tap the market.

After the minutes of the September FOMC meeting, where the Fed suggested that inflation might remain low for longer, today’s US CPI inflation data will probably get extra attention. In September, US CPI inflation is forecast to come out flat on a monthly basis, which should push the annual rate further down from 1.7% Y/Y to 1.6% Y/Y. Downward price pressures were mainly based in commodities, while prices in the services sector are forecast to have increased slightly. We believe that the risks, if there are any, might be for a downward surprise. Core CPI, which excludes food & energy prices, is expected to have picked up by 0.1% M/M, which should lead to a stabilisation in the annual rate at 1.7% Y/Y. Also for the core CPI, we see downside risks.

The EU Commission will probably take the first step in rejecting some countries budget proposals, as they would risk breaching EU rules. More in particular, according to the FT, the EU would ask for more information about the budgets of France, Italy, Austria, Slovenia and Malta. A decision regarding the rejection of the draft budget needs to be taken before the end of the month. Especially, the French and Italian cases are political sensitive as both countries on either the 3% budget limit or on the trimming of the structural deficit are falling short of EU rules. There is room for compromise, but not much. Other countries criticise both countries of dragging their feet in restructuring their public finances. It is officially no discussion point at this week’s Brussels summit of leaders, but certainly will dominate talks in informal discussions.

The German Finanzagentur taps the on the run 30-yr Bund (€2B 2.5% Aug2046).
This year’s previous two 30-yr Bund auctions were technically not subscribed. Bids at the €3B launch in February were €2.79B and the €2B tap in May drew €1.85B bids. Today, the auction yield will be, firmly, below 2% for the first time ever. The bond didn’t cheapen in the run-up to the auction and trades near its most rich levels since the launch of the Bund (MS – 7 bps). At the very long end of the curve (2037-2046), the Bund isn’t cheap either. Therefore, we believe this auction will also have difficulties to be covered.

Overnight, Asian stocks build on yesterday’s WS momentum. The S&P clearly broke above 1904 (neckline double top) again, improving the short term technical picture to neutral. The German Dax is still below similar support in the 8900/9000 area. The weaker yen helps the Nikkei outperform. The US Note future trades flat, suggesting a neutral Bund opening.

Today, the eco calendar is interesting with US CPI data. A slight slowdown from 1.7% y/y to 1.6% y/y is expected but we see risks to the downside of expectations. Such outcome is a positive for core bonds. Last week, global disinflation/deflation fears were one of the main reasons behind the increased volatility. The FOMC Minutes confirmed that the Fed closely follows inflation developments as well. In that respect, three Fed governors called for extending the current QE-3 or starting a new QE-4 should the economy falter and/or inflation slide. Fed rate hike expectations were repriced. The Fed Funds futures now discount a first rate hike in Jan2016 compared to June2015 previously and a median Fed “dot” of 1.3875% for the end of 2015. A weaker inflation outcome would enforce the market’s view that the Fed will keep rates low for longer. Sentiment on equity markets is the second factor to guide bond trading. Core bonds profit from weak equity markets whereas this relationship isn’t very strong in the opposite direction (yesterday limited yield increases despite 2%+ equity gains). On intra-EMU bond markets, volatility increased as well of late. Risk-off sessions trigger large corrections higher. Cautiousness is warranted. The technical picture is still bullish for bonds. For the German Bund, the uptrend line since June was tested yesterday and provides support at 150.45 today. A break lower would be a first indication that the bull run slows.