Core bond markets end session mixed

Rates

Global core bonds slid slightly lower as some profit taking kicked in. Two attempts of the Bund to rally to new highs failed in the morning session, amid an uninspiring EMU eco calendar. It gave way to some mild profit taking, which was undone in early US dealings. Equities hovered up and down, but in negative territory, while oil moved higher. The US ADP employment report (205K) was decent, but near expectations, while the services PMI declined further (53.5 from 55.8) and undershot expectations by a wide margin. Dudley’s dovish comments and the services PMI might have helped (overbought) core bonds lose ground. In a daily perspective, the German curve bull flattened with yield declines ranging from 1.2 bps to 4.9 bps. Later in the US session, profit taking occurred as oil rallied and equities recouped losses. The US yield curve bear steepened with yields 0.4 bps (2-yr) to 5.6 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes were limited between -2 bps and +2 bps with Greece (-9 bps) outperforming.

The influential NY Fed president said that financial conditions tightened sharply recently and policy makers are “acknowledging that things have happened in financial markets and in the flow of economic data that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward.” While he creates some wiggle room by saying that it’s a little too soon to draw firm conclusions, he clearly puts in doubt the Fed’s December dot plot which still forecasted 4 additional hikes this year. He clearly runs behind the market who only discount a rate hike by the end of 2016/early 2017. Fed Brainard overnight said that “recent developments reinforce the case for watchful waiting”.

Thin eco calendar, but lots of events

The eco calendar is thin with only the US jobless claims for which a marginal drop to 277K from 278K is expected (upside risks), US factory orders (weakness) and US Q4 productivity data (drop expected pushing unit costs up). More interesting will be central bank talk with the BoE’s rate decision, the quarterly Inflation Report and a Carney press conference. Several ECB/Fed governors speak as well (see below). The ECB publishes its Economic Bulletin and the EC releases its Winter Economic Forecasts. We don’t expect major changes in the GDP forecasts (respectively at 1.8% for 2016 and 1.9% for 2017), but inflation forecasts (currently at 1.0% for this year and 1.6% next) will probably be revised lower. It might give us some clues about the downward revision of the ECB staff inflation forecasts in March.

Spanish and French taps should go well

Today, the French debt agency taps the on the run 10-yr OAT (1% Nov2025), the off the run 15-yr OAT (3.5% Apr2026) and the off the run 30-yr OAT (4% Oct2038) for a combined €7.5-8.5B. In the run-up to the auction, bonds cheapened in ASW spread terms, especially at the very long end. The bonds trade relatively normal on the French curve. We expect plain vanilla demand. The Spanish Treasury taps the on the run 10-yr Obligacion (1.95% Apr2026) and off the run 30-yr Obligacion (4.2% Jan2037) for a total amount of €2.5-3.5B. This relatively small tap should go well especially as it will be supported by a €20.6B Obligacion redemption. This week’s stellar 30-yr BTP auction (€9B) suggests that sentiment towards peripheral debt remains strong following Draghi’s pre-announcement of March easing. On the Spanish yield curve, especially the off the run Obligacion trades with an attractive pick-up. The US Treasury announced that it cuts issuance of 5-yr, 7-yr, 10-yr and 30-yr debt by $1B each. Instead, they’ll issue more shorter-term bills as investor demand is expected to grow because of reforms to money market funds.

Today: Profit taking into payrolls?

Overnight, Asian equity indices build on yesterday’s WS gains. Japan underperforms on the back of yesterday’s surge of the yen. The oil price trades stable around $35.5/barrel following yesterday’s $3 increase. The US Note future trades sideways, suggesting a neutral opening for the Bund.

Today’s eco calendar is thin with only weekly US jobless claims. Several central bankers could create some volatility (ECB Draghi, ECB Knot, ECB Mersch, Fed Rosengren, Fed Kaplan, Fed Mester, BoE Carney). We keep a close eye on oil prices and equity market sentiment to determine the direction of trading. A further comeback of the oil price is expected to trigger short-term profit taking in overbought markets (both Bund and US Note future) ahead of tomorrow’s payrolls.

Technically, the German 10-yr yield fell below final support (0.42%).
Weakness in equity market/oil prices and the dovish turn of global central banks (ECB, BoE, BoJ and Fed) pulled yields lower since the start of the year. The break lower opens the way for a complete retracement towards the all-time low at 0.05%. The US 10-yr yield dropped fell below 1.9%. From a technical point of view, this also suggests more downside towards 1.64%. Longer term sentiment remains positive for core bonds.

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