Bund stabilizes just below highs

Rates

The German Bund traded sideways around the recent highs yesterday in a dull session. Traded volumes were very low with US markets closed for Thanksgiving. Positive risk sentiment on equity markets was counterbalanced by some end-of-month extension flows. M3 money and lending data were pretty upbeat for the economic outlook, but couldn’t trigger action by traders. They remain convinced about next week’s aggressive ECB easing. The Bund contract high (158.60) stayed out of reach. In a daily perspective, changes on the German yield curve declined less than 1 bp. On intra-EMU bond markets, 10-yr yield spreads versus Germany were nearly unchanged with Portugal outperforming (-8 bps) and Greece underperforming (+9 bps).

Mr. Costa, the Portuguese Socialist leader, took office as Portugal’s new Prime Minister of a minority government supported by two far-left parties, ending a two month period of political instability. While doubts are lingering about Costa’s anti-austerity policy, investors seems currently happy that the political deadlock ended. However, instability risks to return in the medium term.

Only EMU confidence data of importance

Today, the eco-calendar remains empty in the US, where Black Friday will keep trading desks sparsely populated and thus dull trading is the most likely once more the outcome. In the eurozone, the November EC economic confidence is expected to have stabilized at 105.9. We see upward risks to consensus, due to an already published better consumer confidence and to better than expected PMI’s released earlier this week. French consumer spending and Italian confidence data are interesting too, as these countries lagged EMU growth, even if some catching up was visible in recent months, especially in Italy. Normally, they don’t move markets though. The speech of ECB Knot (Dutch) is about financial stability and thus likely irrelevant for trading. However, in the past, the Dutch Central Bank’s views were closely linked to the orthodox Bundesbank ones. Recently, ECB Lautenschlaeger and Weidmann (German) called more monetary easy unnecessary. Will Knot join again his erstwhile allies and enlarge the opposition towards president Draghi’s aggressive policy?

Italian BTP auctions: plain vanilla demand?

The Italian debt agency concludes this week’s scheduled EMU bond supply by tapping the on the run 5-yr BTP (€2-2.25B 0.65% Nov2020) and 10-yr BTP (€1.25-1.75B 2% Dec2025). The bonds richened in ASW-spread terms in the run-up to the auction and especially the 10-yr BTP trades rather expensive at the Italian curve. Nevertheless, the amount on offer is relatively low for Italian standards while peripheral risk sentiment remain strong. Therefore, we expect a plain vanilla auction. Apart from the BTP, the Italian Treasury also taps the on the run 7-yr CCTeu (€0.5-1B Dec2022).

Today: More tecnically-inspired trading

Overnight, most Asian stock markets trade negative with China underperforming (-5%) on the back of weaker industrial profits, widening broker probes and corporate default rumours. Overnight, the US Note future trades stable though. If negative risk sentiment spills to Europe, it could trigger a test of the 158.60 contract high in the Bund. For a sustained break, we believe that more fundamental news is necessary.

Today, the eco calendar remains empty in the US. Volumes will remain low because of thinly-staffed dealing rooms the day after Thanksgiving (Black Friday). In EMU, only EC confidence indicators (upside risks) are scheduled for release. Given these circumstances, we expect more technically-inspired trading in core bond markets.
Risk sentiment on equity markets, end-of-month extension buying, safe haven flows ahead of the weekend, nearby resistance levels (Bund: 158.60),… It’s hard to say which one will dominate.

Technically, the fundamentals (ECB) and technicals (uptrend channel) remain bullish for the Bund. We stay cautious though 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.

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