Core bonds in summer trading mode

Rates

Summer trading kicked in this week, as the Greek issue dissipated from traders’ radar and the calendar was once more nearly empty. This left markets in the hands of short term traders, with some repositioning and technicals at work too. Weaker equities were initially no help for core German bonds, but may have played some role in US Treasury trading. Once more, volumes traded were way below normal levels. In a daily perspective, the German yield curve steepened with yields up to 3.9 bps higher. US Treasury yields parted ways and actually fell by 2.8 to 5.3 bps. In case of US curve, the belly outperformed, as investors unwound some curve flatteners that were much in favour recently, as expectations for a Fed lift‐off got a boost. Also the (failed) test of the 2.40% (10‐ yr) and the 0.70% (2‐yr) in the US Treasury market stimulated profit taking by shorts. All in all, a session that will be forgotten soon. Peripherals lagged Bunds with 10‐year yield spreads widening by 4‐to‐6 bps. Also the semi‐core spreads widened 2‐to‐3 bps. Also here profit taking following strong run may be the explanation.

Eco calendar thin; US earning season in full swing

Today, the eco calendar remains thin with only the US existing home sales and the EMU Q1 government debt and deficit data. The BOE publishes the Minutes of its latest MPC meeting and the US earnings season remains in full swing.

The EMU data are already outdated and less interesting for markets. In the US it will be interesting to see whether the upward trend in housing data remains in place. In May, US existing home sales jumped to their highest level since 2009 and for June a further limited uptick is expected. Existing home sales are forecast to have increased by 0.9% M/M to a total level of 5.4 million. We believe that the risks remain for an upward surprise, supported by favourable weather conditions and as consumers probably want to take advantage of low mortgage rates before they are expected to increase later this year. Inventories have also picked up recently, although the remain quite tight.

S&P upgrades Greece

Rating agency S&P upgraded the Greek rating by two notches from CCC‐ to CCC+ (stable outlook), citing the new 3‐yr loan programme and the received bridge financing. S&P also thinks that the possibility of Greece leaving the euro zone has declined to less than 50% within the forecast horizon (until 2018).

Today, the Greek parliament votes on a second package of reform demanded by international creditors as a prerequisite to start talks on a new bailout. Like last week, PM Tsipras is expected to get the package through parliament with the aid of opposition parties. However, in order to get sufficient votes from his ruling coalition to maintain his political mandate, Tsipras said he will delay one specific measure to prevail more SYRIZA MP’s from voting against the reforms.

Today: Sentiment-driven trading

Overnight, most Asian equity markets trade up to 1% lower. Apple earnings (after US market closure) disappointed (fewer iPhones sold) and are negative for risk sentiment. The US Note future is marginally higher. Risk aversion could be slightly positive for the Bund in the opening, although recently the core bonds didn’t react as prompt as before on weaker equities, a phenomenon we might see occurring more often.

Today, the eco calendar is completely empty in EMU. The second vote in Greek parliament is a risk factor, but should go well. Risk sentiment (via the earnings season) on equity markets could be the most important trading item for the Bund while evolutions on commodity markets will be closely monitored as well (eg gold). We hold a sell‐on‐upticks approach around the recent highs, but have no big view for today’s session.

In the US, the eco calendar contains only existing home sales which is normally no market mover. That means that trading will most likely also be sentiment‐driven. We still prefer to sell Treasuries in case of a return to the highs of the sideways range. With the Greek issue at least temporarily resolved, there is more downside for US Treasuries. Chances of a September rate hike improved. Global financial instability was one of the concerns of the Fed that could delay a hike. With Greece out of the way and tensions on Chinese stocks markets easing, the front end of the US curve could further underperform.