Investors change US treasuries for equities

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Investors change US treasuries for equities

Global core bonds had a calm start to a back-loaded trading week, but the calmness was brutally disturbed in the mid US session when equities soared and US Treasuries dived. There was little respite as equities sprinted again higher in late US session, which drove US Treasuries to the lows of the day. US eco data didn’t play a role whatsoever (see Sunset yesterday). There were multiple sources pointing to investors (pension funds) buying equities and selling US Treasuries at the start of the new month. As Treasuries last week profited from month end extension buying and equities had a more difficult time, we tend to give some credence to these speculations. The Philly Fed nominated Mr. Harker as replacement for outgoing (hawkish) president Plosser, but also this was no valid explanation for yesterday’s trading pattern. In a daily perspective, the US curve bear steepened with the 30-yr bond yield 9.1 bps higher. The German market only partially reflected the US carnage, as its market closed at 18:00. German yields were up to 2.6 bps higher, no strong change in the shape of the curve.

After a well-filled eco calendar yesterday, the agenda is thin today with only EMU PPI inflation data and US vehicle sales. Austria (RAGB) and the UK (Gilts) tap the market. The PPI inflation data in the euro area are still January figures and therefore outdated. The consensus is looking for a decline in PPI inflation by 0.7% M/M in January, which should push the annual rate down to -3.1% Y/Y. Although we see risks are for a downward surprise, the data will be ignored as a rebound is likely in February. In the US, domestic vehicle sales are forecast to show a limited increase in February after having dropped in the previous two months.

The Austrian treasury taps the on the run 5-yr RAGB (0.25% Oct2019) and 10-yr RAGB (1.65% Oct2024) for a combined €1.1B. The bonds cheapened around 3 to 4 bps in ASW spread terms going into the auction. The Oct2019 trades a tad rich while the Oct2024 trades normal. Overall, we don’t expect difficulties. The Finnish debt agency is expected to launch a new long 15-yr benchmark (Apr2031) today via syndication.

Overnight, Asian stocks trade mixed with China underperforming. They can’t build on risk-on sentiment from WS yesterday. The RBA unexpectedly kept policy rates unchanged (see currencies). The US Note future trades stable, suggesting a neutral opening for the Bund.

Today’s eco calendar is empty. Ahead of the ECB meeting/ECB QE purchases and US payrolls, we expect more range trading. For the Bund, the current range is between 157.97 and 159.54/160, but investors are gradually switching from the March contract to the June contract (155.80 – 157.27/157.77). The technical picture nevertheless remains bullish. Longer term, the ECB’s QE programme is expected to cap upward potential from EMU bond yields. The US Note future failed to regain the previous neckline of a double top and is well within the 126-12 – 128-04+ range. Recent sentiment (hawkish Fed comments, ignoring softer data) suggest that we might be heading to the downside of the range going into the payrolls. Longer term, we hold our June rate hike call and think there is more downside in the Note future as markets are positioned more dovish.