Late session equity sell-off push US Treasuries higher

Rates

Global core bonds had quite some reasons to correct higher yesterday, but they failed to do so in a sustained manner until late in the US session when equities tanked. Core bonds then gained on a safe haven bid (especially US Treasuries). The European trading suggests that sentiment remains negative towards the Bund, but renewed risk‐off, if sustained, could change sentiment. In a daily perspective, the German yield curve bear flattens with yields 0.5 bps (2‐ yr) to 3.8 bps (30‐yr) lower. One should take into account that European bonds still had to catch up with the post FOMC developments in US Treasuries, which downplays the significance of lower yields. The US yield curve bull steepened with yields 3.6 bps (2‐yr) to 2.1 bps (30‐yr) lower, typical risk‐off behaviour that favoured the short end. The 7‐yr US Note auction went well, while the Italian and Belgian auctions went okay. Eco data were mixed with stronger EMU EC confidence, lower than expected German CPI and unsurprising claims/US GDP. They had no direct impact on trading. On intra‐EMU bond markets, 10‐yr yield spread changes versus Germany ended nearly unchanged.

Busy calendar with EMU Q1 growth & inflation key

In contrast to the US and the UK, euro zone economic growth is expected to have picked up in Q1 from 0.3% Q/Q to 0.4% Q/Q (consensus). We have no reason to distance ourselves from consensus. Data suggested that the recovery remained sluggish with little signs of improvement, but French GDP surprised on the upside (see headline). The EMU CPI inflation for April is expected to show a stabilisation at 0%, but yesterday’s data showed a slowdown of inflation in Germany, Spain and Belgium and therefore we see downside risks. Higher energy prices will probably be offset by a lower core reading (due to an exceptional early Easter effect, which has downward effect in the month after). Finally, the EMU unemployment rate is expected to have stabilized at 10.3% in March In the US, both personal income and spending are forecast to have picked up slightly in Marc, while the PCE deflator is expected to have slowed from 1.0% Y/Y to 0.8% Y/Y and the core PCE from 1.7% Y/Y to 1.5% Y/Y. After yesterday’s GDP, the PCE should have much impact on markets though. The Chicago PMI might reverse some of its March uptick, with the consensus looking for a drop from 53.6 to 53.0, but we see risks for a downward surprise. Finally, Michigan consumer confidence (final figure) is expected to increase from 89.7 to 90.2, but also here we see downside risks.

Strong 7-yr Note auction

The US Treasury concluded its end‐of‐month refinancing operation with a very good $28B 7‐yr Note auction. The auction stopped firmly through the 1:00 PM bid side and the bid cover (2.65) was the best in more than two years. Bidding details showed strong indirect and good direct bids. Yesterday’s $15B 2‐yr FRN auction went good as well.

Important test of core bonds’ health

Overnight, Asian stock markets trade weaker though losses remain contained given late night WS weakness. Comments from billionaire investor Icahn who sold all his Apple stock triggered selling. Japanese markets are closed today for Showa day. Brent crude continues his march higher and trades now above key resistance ($47.81/dollar). A sustained move above that level would be very significant. The US Note future is unchanged overnight, but the Bund could have some catching up to do in the opening as US Treasuries gained on WS’s losses.

Today’s eco calendar is heavy both in the EMU and the US (see above). Risks are mainly located on the downside of expectations. This could be another good test for our hypothesis that sentiment on core bond markets soured. We expect some gains if eco data effectively disappoint and especially if equity markets correct lower. However, can these gains be safeguarded today? The past sessions, bonds had a hard time doing so…

Technically, we would short US Treasuries and aim for return action lower (support at 128‐01+) as US markets remain 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). In yield terms, the German 10‐yr yield could advance further towards 0.33%. 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.

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