Comeback stocks & commodities continues

Global core bonds traded narrowly mixed on Friday. US Treasuries eked out slightly gains at the longer end of the curve (-2.2 bps 30yr), while the German curve bear steepened with yields up to 3.3 bps higher (30-yr). The comeback of equity and commodity markets were a driver, but technical elements (end of the US financing operation, long weekend) balanced hawkish comments by Atlanta Fed Lockhart (centrist) and (to a lesser extent) NY Fed Dudley.

Fed governors keep 2015 timing lift-off, but…

Atlanta Fed Lockhart still expects a lift-off this year even though he sees a bit more downside risks: “I believe the economy remains on a satisfactory track, and, speaking for myself, I see a lift-off decision later this year at the October or December FOMC meetings as likely appropriate.” Lockhart also believes that inflation data will show an upward trend in due course. However he is a bit less confident in the US economy. Heavyweight NY Fed governor Dudley repeated he is still in the 2015 camp for the lift-off but hedged his view. “Based on my forecast, yes I am, but it’s a forecast. And we’re going to get a lot of data between now and December. It’s not a commitment.” He also said he felt slightly less confident than he was 6 weeks ago. During the weekend, Fed Vice chairman Fischer repeated that he favours a 2015 lift-off, as the economy may be strong enough to warrant a rate hike. Global factors and slower job growth play a role and the Fed remains data-dependent. Therefore they effectively keep the options open for the rate decision in December. Markets until now barely react to the 2015 comments of various governors. Probability of a rate hike still stands at only 39% versus 61% no change.

Heavy supply calendar

This week’s scheduled EMU bond supply comes from Italy, the Netherlands, Germany, Portugal, Spain and France. Tomorrow, the Dutch debt agency taps the on the run 10-yr DSL (0.25% Jul2025) for €1-2B. The Italian treasury launches a new 3-yr BTP (€3-3.5B 0.3% Oct2018) and taps the on the run 7-yr BTP (€2-2.5B 1.45% Sept2022) and 15-yr BTP (€0.5-1B 1.65% Mar2032). On Wednesday, the German Finanzagentur holds a €3B 5-yr Bobl auction (0.25% Oct2020). The Portuguese debt agency sells the on the run 10-yr OT (2.875% Oct2025) and the off the run OT (4.1% Apr2037) for a combined €1-1.25B. On Thursday, the French debt agency taps the on the run 5-yr OAT (0.25% Nov2020) and two off the runs (4% Apr2018 & 3% Apr2022) for a combined €7-8B. The Spanish treasury taps the on the run 3-yr Bono (0.25% Apr2018), 10-yr Obligacion (2.15% Oct2025) and 15-yr Obligacion (1.95% Jul2030). This week’s auctions will be supported by a €5.45B Portuguese redemption.

Today: Quiet start with US markets closed

Overnight, Asian stocks markets trade mixed with China outperforming (up to 4% higher). Japanese markets are closed. Comments by Fed governors pointed in the direction of a 2015 lift-off, but found no hearing on markets. The US Note future trades sideways, suggesting a neutral opening for the Bund.

Today, US markets are closed for Columbus day so volumes will be very low. The eco calendar is completely empty apart from three Fed speakers. Atlanta Fed Lockhart (2015) and Chicago Fed Evans (mid-2016) spoke recently, so we mainly look at Washington-based governor Brainard’s comments (after market closure). Washington governors tend to vote in block, so any comments on the lift-off data could be relevant for markets. Overall, we have no strong view for today’s trading. Risk sentiment on equity markets will likely set the tone for bond markets.

After the dovish September FOMC meeting, we eyed a return to the contract high for the US Note future (129-10+), but we didn’t anticipate a break higher. That last assumption was under severe pressure after disappointing payrolls, but ultimately both the US Note future and the Bund are back in the ranges. We hold our cautious sell-on-upticks approach for core bonds around current levels for return action to the lower bound of the established ranges.

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