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Bund hit by profit taking on strong PMI and oil jump

Yesterday, global core bonds started the week on a weak footing, especially German Bunds. After a 10 day winning streak, some profit taking wasn’t surprising. Strong(er) EMU business confidence, a (more temporarily) spike in oil prices and an overbought position played a role in the long slide lower. Also the test of the lows in the German 2s and 5s and the drop of the 10‐yr yield below 0.50% on Friday were good reasons to build back some long exposure. Similarly, since October 21, the US‐German 10‐yr yield spread blew out to 178 bps from 145bps. In a daily perspective, the German yield curve bear steepened with yields changes ranging between ‐0.3 bps (2‐yr) and 5.7 bps (30‐yr). US Treasuries slid more slowly than the Bund and spiked higher later on, also helped by a decent 2‐yr Note auction. The Bund regained some extra ground after the European official closure. US yields ended to 2 bps lower. On intra‐ EMU bond markets, 10‐yr yield spread changes versus Germany ranged between ‐3.4 bps (Spain) and flat (Portugal) with Greece underperforming (+22 bps). The Portuguese president Silva asked Costa for guarantees before eventually accepting a minority government.


Interesting US and German eco calendars

The US Q3 GDP data is expected to be revised upward to an annualized 2.1% (Q/Qa) from the advance estimate of 1.5% (Q/Qa). We expect the majority of the revision to come from inventories which would subtract about 0.9%‐point of GDP instead of the 1.44%‐point advance estimate, a result of recently newly released stats. We side with the consensus. If the upward revision is indeed due to inventories it won’t have much impact. Inventories are a swing factor in GDP calculations. Other categories should show only small revisions. The US consumer confidence index (Conference Board) is expected to have increased to 99.5 in November from 97.6 previously. We see upward risks to consensus, as the Michigan measure of confidence improved and as the US payrolls were very strong. Labour market conditions impact the Conference Board measure of confidence more than the Michigan one. The EMU eco‐calendar contains the German IFO Business climate indicator which is expected to remain stable at 108.2 in November. Given the increase in yesterday’s published PMI’s, we see risks to the upside of expectations, even if both indicators not always move together.


Finland & Netherlands tap the 2025 sector

In the US, the Treasury successfully issued a $26B 2‐yr T‐Note. The auction stopped well through the WI at the stop. The bid/cover was still low at 3.15 (average 3.35). The auction yield was the highest yield since April 2010. Today, the US Treasuries issues a $35B 5‐year Note. It trades currently at 1.68%. The Netherlands and Finland tap the 2025 sector. The Netherlands sells up to €2B of its 0.25% July 2025 DSL bonds. The Dutch rating is AAA at all three agencies, with an upgrade last Friday by S&P. The auction shouldn’t pose problems. The bond trades about 12 bps below ASW (at a nominal 0.68%). Finland sells up to €1B of its 0.875% September 2025 benchmark. It trades at 0.777% or about 4 bps below ASW. It has a AAA rating with Moody’s and Fitch and a AA+ at S&P.


Today: Indecisive trading?

Overnight, Asian equities trade mixed to slightly higher. The T‐Note is about flat. Overnight, in a letter to savers, Yellen defended the zero policy of the past years and added that the Fed will tighten policy only gradually after the lift‐off. She was cautious in her other remarks.

Today, the eco calendar is interesting with US consumer confidence and German IFO, both with some upwards risks to consensus. No signs of a Fed discount rate hike, probably refused by the Board of governors. We saw yesterday that Bund investors were prone for some profit taking, but US investors weren’t ready to join and even kept the Note future above key 126‐16 support. Even as the data might be bond‐negative, we think that investors aren’t ready for directional moves. So, we stick to the expectation that trading may be primarily technically inspired. The upside in the Bund should be protected, while the downside in Treasuries should be difficult.

Technically, the Bund hadn’t registered one day of losses in the past ten sessions, but that changed yesterday. So, while the fundamentals and technicals remain bullish, we stay cautious and still consider some lightening of long positions especially if we would test the highs (Bund). We see, as before, little value when German 10‐yr yield is below 0.50%. The T‐Note future tested key 126‐16 support, but no sustained break occurred. The bears probably won’t go immediately for another test.. Therefore, we hold our sell‐on‐upticks for US Treasuries or even lightening long positions straight away.

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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