Underperformance of Bunds, while trading ranges hold

Rates

Global core bonds had a choppy trading session but they remained in narrow ranges. During the European morning session, a somewhat better IFO business sentiment gave the sell signal for the Bund, while it pushed equities higher. The Bund selling dried up in mid-morning at an intra-day low of 158.93. It was a test of the sell-off lows, but there was no follow through selling and the Bund turned north again, helped around noon by comments of Euro group chairman Dijsselbloem, who was annoyed about the slow progress in talks with Greece and (together with Draghi) refused to consider a partial aid disbursement for partial reforms. In the intra-EMU market, Greece paid the price (10-yr yield + 42 bps), with small widening for the periphery. The US durables disappointed once more and the US Treasury Note future profited, eventually closing at 129-14+ (a 10/32 daily gain). The Bund closed marginally higher at 159.35 a 18 ticks gain. Yields were nearly unchanged for German bonds while US Treasury yields fell by up to 5.1 bps (5-yr). Concluding, US Treasuries and Bunds remained within their ranges, but in recent days US Treasuries outperformed Bunds.

Thin eco calendar today, more promising later on

Only the first estimate of the US Markit services PMI is on the agenda, but given the poor correlation with the ISM, the market reaction is usually limited. Several ECB members speak at a joint conference (European financial integration and stability) of the ECB and EU Commission. It might be more academic in nature and not focus on current hot market issues. Four main events might shape this week trading. First, the FOMC meeting that concludes on Wednesday.
Expectations for a lift-off in June have declined dramatically, helped by Fed comments. So, we don’t expect hints in the FOMC statement that a rate hike is imminent. Weaker eco data might result in a more sober assessment of the eco environment, even if the FOMC probably still sees the weak data as partly transitory. The Fed remains data-dependent. Second, the inevitable Greek saga. After the disastrous meeting of the euro group on Friday, according to sources, PM Tsipras has called chancellor Merkel to hold an emergency meeting this week, but it is unclear whether such a meeting will take place. This week, Greece has to pay government workers and pensioners, while on May 6 a €194M IMF-repayment needs to be done. At that point, the ECB will also decide on the haircut on Greek collateral. So, the situation is precarious and the endgame near. Third, the discussions inside the PBOC on buying local government bonds. Fourth, the eco data on which more in following days…

Italy, the Netherlands, Germany and the US tap market

This week’s EMU bond supply comes from Italy, the Netherlands and Germany. Today, the Italian debt agency kicks off by tapping inflation-linked and zero-coupon bonds. Tomorrow, the Dutch debt agency taps the on the 30-yr DSL (2.75% Jan2047). On Wednesday, the German Finanzagentur auctions the on the run 5-yr Bobl (€4B 0% Apr2020). The Italian treasury launches a new 5-yr BTP (€3-4B 0.7% May2020) and taps the on the run 10-yr BTP (€1.5-2B 1.5% Jun2025) and a floating rate CCTeu. This week’s auctions will be supported by a €19B Spanish redemption. In the US, the treasury starts its end-of-month refinancing operation with a $26B 2-yr Note auction. Currently, the WI is trading around 0.53%.

Today’s Strategy

Overnight, most Asian equity markets trade positive with China outperforming and Japan underperforming. Chinese stocks profit from rumours that the PBOC discusses direct purchases of local government bonds. However, we fear that risk sentiment in Europe could be less positive on the back of Friday’s failed attempt to broker a Greek solution at the Eurogroup meeting. Greece is rapidly running out of cash (tax authorities even started seizing the deposits of small debtors) and Europe is rapidly running out of patience with the country’s attitude. A short term default seems more and more likely. The Bund can profit from safe-haven flows while peripheral spreads will probably suffer from the Greek widening. Rating agency Fitch affirmed the BBB+ rating (stable outlook) from Spain and Italy. This won’t impact markets though.

Today’s eco calendar is uninspiring. There will be plenty of headlines and rumours on Greece, which are expected to have a downbeat tone. In that case, last week’s correction lower/profit taking move could already be over. Technical teams from Greece and the Troika will hold a teleconference today and convene on Wednesday to speed up negotiations. For the US, we expect more range-trading ahead of the FOMC meeting. Technically, the US 10-yr yield trades sideways within the 1.82%-2.01% range since mid-March. We expect no break at least until next week’s FOMC meeting.