Core bonds ignored crashing equities

Rates

Global core bonds had a quiet sideways oriented session, at least until the very weak US 5-year Note auction (see lower). Sharply declining equities, especially NASDAQ, were unable to give core bonds (nor currencies) much impetus. For the first time since the FOMC meeting , the yield spread between US and Germany (slightly) widened. After a weak 5-yr Note auction, US Treasuries left inertia and fell lower. The US curve shifted higher by 4 to 5 bps, without changing the shape of the curve considerably. The German yield curve shifted about 1.5 bps (up to 10-yr) to 2.6 bps (30-yr) lower. The German IFO business confidence was stronger than expected, but after the strong PMI’s on Wednesday it had no impact. Similarly, US headline and core durable orders had no lasting impact, even as these disappointed once more. The ECB, raised the ELA ceiling for liquidity operations of Greek banks with the Greek central bank to €71.1B from 69.8B previously, keeping the Tsipras government on a short leash. Greek bonds underperformed (10-yr yield spread increased by 15 bps) while other peripheral spreads changes were negligible.

The eco calendar is rather thin today, with only euro zone M3 money supply and credit data and US initial jobless claims. Fed’s Bullard & Lockhart are scheduled to speak and Italy (CTZ & BTPeis) and the US (7Yr Notes) will tap the market. Bullard and Lockhart spoke already since the latest FOMC Minutes and thus shouldn’t affect markets. ECB Draghi speaks to Italian politicians.

In January, euro zone M3 picked up to its highest level since April 2009 and a further increase is expected for February. The annual rate of growth is expected to have accelerated from 4.1% Y/Y to 4.3% Y/Y in February, but more important will be the lending data. Lending to non-financials started to pick up two months ago and it will be interesting to see whether this improvement continues. The ECB’s targeted LTRO’s might start to have an impact, while the strengthening recovery should support demand for credit. Lending to households might accelerate following cautious improvements over the last few months. In the US, initial jobless claims were broadly stable in the week ending the 14th of March and the same is expected for the week ending the 21st. The consensus is looking for a drop from 291 000 to 290 000. As the effects of poor weather conditions should have faded, we believe that the risks are for a lower outcome.

In the US, the Treasury continued its mid-month refinancing operation with a strong $13B 2-yr FRN auction and a weak $35B 5-yr Note auction. The 5-yr auction stopped with a significant tail and the bid cover (2.35)was the smallest since July 2009. Bidding details showed a dip in indirect bids, while direct and dealer bids remained weak. Today, the US Treasury holds a $29B 7-yr Note auction. Currently, the WI is trading around 1.715%. In EMU, the Italian debt agency holds zero-coupon and inflation-linked auctions.

Overnight, most Asian stock indices trade in negative territory though losses are contained given yesterday’s WS slaughter. Japanese equities underperform on the back of a stronger yen, while Chinese stocks outperform and even trade positive. Air strikes in Yemen push the oil price higher, but don’t seem to trouble other markets yet. The US Note future trades modestly higher.

Today, the eco calendar contains US weekly claims and EMU lending data.
Risks are for further improvement, but these data are unlikely to impact core bonds. Fed’s Bullard and Lockhart spoke recently and won’t bring new elements to the FOMC debate. That leaves technical elements and risk sentiment as main trading factors today. If yesterday’s correction on equity markets continues it’s hard to see core bonds move lower even though the risk-off correlation has been loose of late.

Technically, the US 5-yr and 10-yr yield fell below key support levels (1.4% & 1.94%), opening the way for a test of the cycle lows (1.15% & 1.64%). The technical picture for the Bund remains bullish.