German Bund moved sideways in a 30-tick range

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Yesterday’s trading was uneventful. The German Bund moved sideways in a 30-tick range. The intraday low was reached in the wake of a stronger German ZEW. The expectations component was significantly better than expected and increased for the first time this year. During US dealings, PPI data and NAHB building index surprised on the upside of expectations but once again failed to trigger higher US rates. At the end of dealings, the US yield curve shifted 0.4 bps (2-yr) to 2.5 bps (10-yr) lower. Changes on the German yield curve ranged between -0.2 bps (30-yr) and +1 bps (2-yr). On intra-EMU bond markets, Greece underperformed on rumours of a stand-off with the Troika ahead of the final aid payment and fears of snap elections.

Today, the eco calendar is empty for Europe. ECB Praet is scheduled to speak but he was already very dovish earlier this week. In the US, housings starts and building permits will be released. Can they give more evidence on the recovery of the housing market? Later, after the European closing bell, the FOMC Minutes of the October meeting will be released. That’s the meeting where the Fed decided to end QE-3, altered the forward guidance to make the lift-off date data-dependent, sounded more optimistic on the labour market (without exciting expectations that hike was imminent) and downplayed risks of too low inflation. It will be interesting to see how this “hawkish” consensus was reached. Especially the shift of the centre (including chairwoman Yellen) can give us more hindsight. Furthermore, we hope to find clues on whether the forward guidance will be changed again in the near future, this time to exclude the “considerable time” phrase.

Overnight, Asian equities trade mixed. The Bank of Japan kept its pledge to expand the monetary base by 80 trillion yen . It puts the yen slightly under downward pressure. The US Note future trades stable overnight, suggesting a neutral opening for the Bund.

Today, the eco calendar is thin with the FOMC Minutes the key release. That’s after European trading and ahead of it, risk sentiment and technical factors might dominate as main market drivers. Regarding the FOMC Minutes, we expect that the hawkish shift in October will lead to a hawkish shift in the Minutes. Eventually, one needs a majority to drive through changes. Therefore, the centre of the board (including Fed chair Yellen) must have “changed” its opinion. Any more specific hints on a lift-off date or further modifications to the forward guidance will be closely looked for. The assessment of the labour market and inflation outlook are other market-sensitive subjects. Hawkish FOMC Minutes are a negative for US Treasuries, but with a disclaimer: the past two weeks, decent to stronger data failed to trigger substantially higher rates.

The FOMC changed its forward guidance to include the data-dependence of the lift-off date. We argued that US Treasuries would become more sensitive to US eco data.. We are disappointed in the market reaction until now but our main view remains that the FOMC verdict opened the way for a new downleg of US Treasuries (125-27 1st support), especially if accompanied by stronger data. Any spill-over from higher rates to Europe will be very limited, with the ECB clearly studying the option to ease policy further. The downside in the Bund seems well protected (149.91 first support). Sideways trading between that support and the contract high (152.49) is likely.