Overnight, Asian equities trade positive with Chinese outperformance

Rates

On Tuesday, the return of US traders following the long weekend didn’t bring amino to the bond and other markets. There was some modest intraday volatility (bonds declined till noon and recouped the decline in the afternoon session), but by the end US and German bonds ended virtually unchanged. The ZEW economic sentiment survey showed sentiment remained strong. The ECB MRO and SMP tenders resulted in a net injection of about $50B in the money market (settlement today). This should ease eonia tensions. On intra-EMU bond markets, spread changes are small though Portuguese bonds continue to outperform.

Today, the market calendar remains unattractive. There are no main eco releases in the US and the EMU. The German debt agency holds a Schatz auction and Spain launces a syndicated 10-year deal (see below). The Bank of Canada decides on rates, but nothing is expected. The earnings season continues, but there are no bellwether reports on the agenda.

Today, the German Finanzagentur taps the on the run 2-yr Schatz (€4B 0% Dec2015). It’s the final tap of this bond and the amount on offer is lower than normal (€5B). Last year, total bids at Schatz auctions averaged €7.8B. In the runup to the auction, the Schatz didn’t specifically cheapen in ASW-spread terms but the bond trades slightly cheap on the short end of the German yield curve.
All in all, we thus expect this auction to go smooth. The Kingdom of Spain announced yesterday its intention to sell a new 10-yr Obligacion via syndication (Apr2024). The transaction is expected to be launched in the near future (likely today), subject to market conditions.

Overnight, Asian equities trade positive with Chinese outperformance. The PBOC injected liquidity to the financial system for a second straight day to ease pressure on short term money market rates. Australian equities lag after higher inflation number. Finally, the BoJ stuck to its record easing but this didn’t surprise markets. The US Note future trades lower overnight, suggesting a lower opening for the Bund.

The eco calendar is empty both in EMU and US, giving no guidance for trading. That means technicals remain at play and are positive for core bonds. The German Bund future took out the 140.56 neckline of the previous top, which improved the technical picture, but key resistance at 142.25 (contract high) is now looming, which calls for cautiousness and opens opportunities to go short. Over the past week, the Bund also outperformed US treasuries with the 10-yr German/US yield spread rising to the 110 bps cycle high, an extra reason to be attentive. In yield terms, the German 10-yr yield fell to 1.75% last week and we would consider installing new Bund short positions in the 1.65-1.7% area. In the US, we target 2.75% as entry-level.