Global core bonds conclude week with quiet session

Rates

On Friday, global core bonds moved sideways in an uneventful closing session of the week. The Bund digested Thursday’s losses. There was some intraday correlation with the gyrations from oil prices, but it didn’t leave much traces.
The EMU business sentiments indicators stabilized in April, a bit below consensus, but could only push Bunds temporarily higher. The US Market PMI sentiment disappointed, but was ignored. Also other markets couldn’t give bonds a distinct direction. European equities traded sideways, ending modestly lower. Oil closed a bit higher, while the dollar strengthened across the board. In a daily perspective, the German yield curve steepened with yields 1.5 bps (2-yr) lower to 2.5 bps higher (30-yr). The Bund was up a minuscule 9 ticks on the day though. US yields were 1.2 to 2.7 bps higher, the belly of the curve slightly underperforming the wings.

Peripheral and non-German core 10-yr yield spreads virtually stabilized.
Greece outperformed again, while Portugal underperformed. After narrowing 58 bps on Thursday, Greek spreads narrowed another 30 bps Friday on hopes an agreement between parties would lead to a conclusion of the first bail-out review and allow the disbursement of funds. However, there are still more negotiations needed and support of Greeks to stay inside the euro area is diminishing according to polls. IMF Lagarde said an agreement was within reach as long as Greece approves “contingency measures to ensure a 2018 budget surplus is met”, but the Greek FM said legislation on that base isn’t allowed in Greece. The remarks show though that a haircut, a IMF demand, is no longer needed to secure IMF participation now, but nevertheless seem to be possible later on (bait for Greece). The Spanish Economy Minister De Guindos said that the overshoot of the deficit target was due to lower than expected inflation that eroded the tax income. An attempt to avoid EU measures?

 

Thin eco calendar: IFO & US New Home sales

On Friday, the German PMI’s showed a mixed picture with the manufacturing one showing a substantial improvement (51.9 from 50.7), while the services PMI weakened slightly (54.6 from 55.1). Today’s German IFO business climate indicator is expected to show a limited improvement, from 106.7 to 107.1, in April which, if confirmed, would be the second straight increase. We see risks for a stronger outcome following a significant weakening earlier in the year. US new home sales are expected to have increased for a second straight month in March, but we believe that the risks are for a downward surprise.

 

Low EMU bond supply this week

This week’s EMU bond supply is thin with only scheduled auctions in Germany and Italy. On Wednesday, the German Finanzagentur taps the on the run 30-yr Bund (€1B 2.5% Aug2046). On Thursday, the Italian treasury launches a new 7-yr floating rate CCTeu (€2.5-3B Jul2023) while also tapping the on the run 5-yr BTP (€1.75-2.25B 0.45% Jun2021) and 10-yr BTP (€2-2.5B 1.6% Jun2026). This week’s auctions will be supported by redemptions from France (€30B), Italy (€12.5B) and Spain (€21B). The US Treasury holds its end-of-month refinancing operation with a $26B 2-yr Note auction tomorrow, a $34B 5-yr Note auction on Wednesday and a $28B 7-yr Note auction & $15B 2-yr FRN auction on Thursday

 

Minor risk aversion, but waiting on the Fed?

Overnight, Asian stock markets trade around 0.5% lower. Oil prices trade with a small negative bias, while the yen gains some ground. Some limited risk aversion thus, with the US Note future marginally higher. We expect a neutral to slightly stronger opening for the Bund.

Headlines about the Austrian presidential election outcome (gain extreme-right) and the car scandal could initially prolong risk aversion this morning though we don’t expect a lasting impact. The eco calendar contains German Ifo Business Climate with risks on the upside of expectations. That’s a minor negative for the Bund. However, we expect that many investors will remain side-lined at the start of the trading week awaiting the FOMC meeting (statement on Wednesday evening). Risk sentiment will remain the main driver behind intraday moves in the run-up to that meeting.

Technically, the US Note future trades below 129-26 support. We would short US Treasuries and aim for return action lower (next support at 128-01+) as US markets are too dovish positioned. We also hold on to our sell-on-upticks approach in the Bund. The drop below 163.16 suggests return action to the March low (160.81). We “fear” that the ECB has no (or limited) tools left to ease policy further and a sudden correction like this time around last year could be around the corner.

 

•  Download Full Sunrise Market Commentary