Today: More asymmetry for core bonds?

Rates

Core bonds pay-back time as risk-on returns (temporarily?)

For a long time; it looked like “Black Monday” would be followed by “Turnaround Tuesday”. After three consecutive sessions of huge China-driven losses, European stocks gained around 3.5 to 4.5% while commodities rebounded. Core bonds suffered a significant setback with Bunds underperforming. Firmer equities, stronger German IFO business confidence, a Chinese rate and reserve requirement cut and stronger US consumer confidence all conspired to bond selling in big size. The extent of the Bund losses on yesterday’s risk-on was bigger than the gains it eked out in recent series of risk-on sessions. However, in the final US trading hour, US equities gave back all intra-day gains, closing even 1.35% lower. At that time, the official bond future trading had ended, but the T-Note future still erased part of the losses. This affected intraday changes for US Treasuries. In a daily perspective, the US yield curve steepened with yields between 3.2 bps (2-yr) and 7 bps (30-yr) higher. The German yield curve bear steepened too but with bigger changes ranging from 1.4 bps (2-yr) to 16.2 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spreads versus German narrowed up to 10 bps (Portugal) with Greece (-67 bps) outperforming.

Today, the euro zone eco calendar is thin, while in the US, the durable goods orders are on the agenda. ECB’s Praet & Fed’s Dudley are scheduled to speak and Italy (CTZ) and the US (5Yr Notes & 2Yr FRN) tap the market. In June, US durable goods orders rebounded by 3.4% M/M led by a rise in Boeing orders after the Paris air show, but also orders ex transportation showed a limited increase. For July however, the consensus is looking for a limited decline, by 0.4% M/M as Boeing orders probably dropped following the surge in June. The payback in aircraft orders will most likely be partly offset by an increase in orders for motor vehicles and parts. Excluding transportation, orders are forecast to have increased for a second straight month (by 0.4% M/M following a 0.6% M/M gain in June). We see downside risks as business investments probably remained poor due to a lack of demand from abroad.

Mixed 2-yr US Note auction

The US Treasury started its end-of-month refinancing operation with a mixed $26B 2-yr Note auction. The auction stopped just below the 1:00 PM bid side, but with a light bid cover (smallest since last October; 3.16). Bidding details showed light demand all around. Today, the Treasury continues with a $13B 2-yr FRN auction and a $35B 5-yr Note auction. Currently, the WI of the latter is trading around 1.44%.

Today: More asymmetry for core bonds?

Overnight, Asian stock markets give only a lukewarm welcome to the latest Chinese easing measures (given the huge crash of the past sessions). Yesterday evening’s WS weakness also tempers enthusiasm. Chinese and Japanese indices gain around 3% while the US Note future trades lower.

Today, the eco calendar contains US durable goods orders and a speech by influential NY Fed governor Dudley. Risks to US durables are on the downside of expectations, but risk being overshadowed by global market sentiment like yesterday’s consumer confidence. Dudley’s speech will be scrutinized for hints on a September rate hike. Recent market turmoil pushed market expectations of a first Fed rate hike into 2016. We don’t rule out a September lift-off yet though, if global markets stabilize the next few days. Tomorrow/Friday’s Jackson Hole powwow might offer more clues in this respect.

Recent volatility on equity markets triggered an asymmetrical reaction on core bond markets. Risk off sessions only marginally triggered safe haven flows while risk on corrections (yesterday) caused severe damage to the Bund and US Note future. Given this pattern, we expect the recent highs in the Bund (156.49) and US Note future (129-28+) should be able to hold, even if volatility on equity and commodity markets remains. On peripheral bond markets, a similar pattern