Core bonds profit from soft ECB and US eco data

Rates

Yesterday, global core bonds profited from a dovish ECB President and another batch of disappointing US eco data (Empire manufacturing & industrial production). The Bund reached another high with the German 10-yr yield below 0.11%. ECB’s Draghi tried to downplay the possibility of an early stop to the QE programme.
Critique on scarcity of sovereign bonds was described as “a little exaggerated” and “premature”. For a full review, see our FLASH report. At the end of the session, the German yield curve flattened with the 30-yr 5.1 bps lower. The 2-yr underperformed (+0.5 bps) as Draghi ruled out another deposit rate cut. The US yield curve shifted 0.3 bps (30-yr) to 2.3 bps (5-yr) lower.

On intra-EMU bond markets, Greece underperformed again with the Greek yield curve inverting further. German FM Schaeuble said that no one expects a solution at the next eurogroup meeting and that Greece is a “bottomless pit” unless it becomes competitive. An adviser to PM Tsipras signaled that the government may have to hold a national referendum on how to proceed if the talks remain deadlocked. After European trading, rating agency S&P cut the Greek rating from B- to CCC+ (outlook negative). S&P added that if the nation fails to meet an obligation to one of its non-commercial creditors (ie bailout loans), it wouldn’t automatically trigger a further cut to a “selective default”.

More US eco data on the agenda

The European eco calendar is uneventful today, but the US one remains interesting. After having weakened sharply since the end of last year it will be interesting to see whether there are finally signs of improvement in the Philadelphia Fed index in April. The consensus is looking for a marginal improvement from 5 to 6, but we see risks for a bigger improvement, supported by more favourable weather conditions and as the impact of the stronger dollar might start to fade. Better weather conditions are also expected to boost housing starts in March as weather conditions improved during the month. The consensus is looking for a rebound by 15.9% M/M to a total of 1040K. Overall however, weather conditions remained below average and therefore we believe that the risks are for a more limited rebound in March, before a further pick up in the coming months. Building permits are forecast to show a limited decline by 1.9% M/M following a 4% gain in February. Finally, US initial jobless claims are forecast little changed in the week ending the 11th of April (280 000 vs 281 000 in the week before). We believe however that the risks are for an upward surprise in the week after Easter, but swings in both directions are possible as seasonal factors often cause distortions around the timing of Easter.

Spain and France supply EMU bond market

The Spanish debt agency taps the on the run 5-yr Bono (1.4% Jan2020), the on the run 10-yr Obligacion (1.6% Apr2025) and the off the run 30-yr Obligacion (6% Jan2029) for up to €5B. The bonds cheapened in ASW-spread terms going into the auction. On the Spanish curve, the Apr2025 is rich, while the Jan2029 is cheap. Overall, we expect the auction to go well. Spain already raised 40% of this year’s issuance. The French treasury sell the on the run 3-yr OAT (0% Feb2018), the off the run 5-yr BTAN (0.5% Nov2019) and the on the run 5-yr OAT (0% May2020) for a combined €7-8B. We expect no difficulties, as usual with French auctions. Additionally, the debt agency tries to raise €1.5-2B by tapping inflation-linked bonds.

Today’s Strategy

Overnight, nearly all Asian equity indices trade positive in line with WS’s gains yesterday. China outperforms with more rumours about additional stimulus measures. Australian labour market data printed strong (see currencies). The overall tone of the Fed’s Beige Book was on balance slightly more downbeat for present conditions, but the longer-term outlook remains solidly positive. The US Note Future trades modestly lower though in line with positive risk sentiment on stock markets. However, we won’t take this a given for Europe as news flow on Greece is very downbeat (see above).

Today’s European calendar is empty. Investors will further digest the dovish ECB meeting and developments in Greece. Together with the bullish technical picture, they suggest even more gains for the Bund. However, as we’ve entered overbought conditions, short term profit taking is always possible. There are no signs that a downward correction will go far though.

In the US, more eco data are up for release (see above). US Treasuries are eager to react to disappointments as was the case the past days. Weak Q1 growth makes a June rate hike very unlikely. Several Fed governors speak but they all already expressed their views after the March FOMC meeting. Earnings and comments from the G-20 Meeting for Ministers of Finance and central bankers are wildcards for today.