German 10-yr yield tests 0.15% record low

Rates

Yesterday, sentiment was slightly risk-off at the start of the European session.
Alarming headlines from the IMF suggested that countries may have to adjust to a new reality of lower potential growth. The Bund approached the contract high (159.21) with the German 10-yr yield back below 0.16%. After the stronger opening, the Bund remained near the highs in another low volume, news-thin session. At the end of the session, the German yield curve shifts up to 3 bps lower (5-yr). US Treasuries underperformed. They slid lower during US dealings into the $21B 10-yr Note auction. The auction went well (see below) and put a bottom under the Note future. Comments by Fed’s Dudley were ignored, while the FOMC Minutes only triggered some volatility around the release. At the end of the day, US yield changes ranged between +1.1 bp (30-yr) and +2.6 bps (5-yr).

FOMC readying for lift-off, but June too early

The FOMC Minutes showed that, at the time of the March meeting: "Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting. However, others anticipated that the effects of energy price declines and the dollar's appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016." Since the meeting, we had surprisingly soft payrolls and other firsttier reports. These suggest less robust Q1 growth has reduced chances of a June rate hike despite “several” proponents. NY Fed Dudley aligns with this reasoning. In a Reuters interview yesterday he admitted that the bar to a June rate hike had risen, while insisting that he had not completely ruled it out.

In addition, the Minutes showed that members generally judged the situation on the labor market improved, while the assessment of inflation was diverse.
Overall, the conclusion was in line with Yellen’s speech (Mar 27): “the normalization process could be initiated prior to seeing increases in core price inflation or wage inflation. Further improvement in the labor market, a stabilization of energy prices, and a leveling out of the foreign exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up". So overall, the Fed is clearly positioning for a lift-off, but June will likely be too early.

Claims volatile because of Easter holidays?

The eco calendar is thin with only US initial jobless claims. Last week, claims showed a sharp drop, nearing again the cyclical lows. Initial claims fell from 288 000 to 268 000 in the week ending the 27th of March, but a pick-up is expected for the week ending the 4th of April. The consensus is looking for an increase from 268 000 to 283 000. The week under review is a holiday-shortened week due to the Easter holidays, which might cause volatility in both directions.

Spain taps bond market.

The Spanish debt agency taps the on the run 3-yr Bono (0.50% Oct2017), the off the run 15-yr Obligacion (4.65% Jul2025) and the on the run 30-yr Obligacion (5.15% Oct2044) for a combined €4-5B. In the run-up to the auction, there was no cheapening in ASW-spread terms. However, we expect good demand, also for the longer tenors. The ECB published a breakdown of PSPPpurchases earlier this week, which showed that the weighted average maturity of current purchases was the longest for Spanish bonds (11.66 years). Year-todate, Spain raised nearly 40% of this year’s expected funding need.

In the US, the Treasury continued its mid-month refinancing operation with a very good $21B 10-yr Nota auction. The auction stopped through the 1:00 PM bid side while the bid cover was slightly below average (2.62 vs 2.69). Bidding details were solid with the indirect bid again driving the auction. Today, the Treasury concludes with a $13B 30-yr Bond auction. Currently, the WI is trading around 2.53%.

Today’s Strategy

Overnight, Asian equities are mixed to slightly weaker with Japan and Hong Kong outperforming. Alcoa results were mixed as well. The US Note future trades neutral.

Today’s eco calendar is thin with only US claims, which are likely distorted.
FOMC Minutes can be further digested, but we don’t think that they changed the post-FOMC thinking that September is now more likely for a first rate hike. US yields are below important technical levels, suggesting more downside (upside for US Treasuries), especially with US supply almost out of the way.

In Europe, more low-volume, sideways trading can be expected for the Bund. The technical picture remains bullish. Greece remains a factor of uncertainty as an IMF repayment is due today (€450M). A deal on unlocking more bailout funding is not expected before the next scheduled meeting of eurozone finance ministers in Riga on April 24.