This week's EMU bond supply is rather thin

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On Friday, global core bonds fell prey to some profit taking ahead of the weekend. At the start of the trading session, the Bund nevertheless first reached a new cycle high on the back of lower regional German inflation numbers and a negative Spanish figure. The German yield curve shifted 0.3 bps (30‐yr) to 1.5 bps (5‐yr) higher. US treasuries underperformed ahead of the release of some key eco numbers this week (ISM’s, ADP, NFP). Changes on the US yield curve ranged between +0.4 bps (2‐yr) and +4 bps (10‐yr). On EMU bond markets, 10‐yr yield spreads versus Germany shed up to 3 bps. Greece outperformed (‐23 bps) anticipating the release of the next aid tranche. This weekend, the Greek parliament approved a structural reform package which opens the way for a €8.3B disbursement by EU/IMF. Eurozone finance ministers are expected to approve the aid tranche on Tuesday.

Today, the focus will be on the flash estimate of euro zone HICP inflation data for March. In the US, the eco calendar is thin with only the Chicago PMI, ahead of tomorrow’s manufacturing ISM. Fed Chairwoman Yellen is scheduled to speak in Chicago.

According to the final reading, euro zone HCIP inflation slowed further in February to 0.7% Y/Y (from 0.8% Y/Y), matching the multi‐year low reached in November. The first reading of March HICP inflation is forecast to show a further drop, to 0.6% Y/Y, which if confirmed would be the lowest level since end 2009. On Friday, Belgian and Spanish HICP inflation showed a further slowdown in March with the Spanish reading even surprising on the downside. We believe that the risks for the euro area reading are also on the downside of expectations, largely due to negative base effects and the late timing of Easter this year, while also energy prices might have weighed on the headline reading. Core inflation is forecast to have eased to 0.8% Y/Y from 1.0% Y/Y, following an uptick in the previous month. In the US, the Chicago PMI is forecast to show a limited drop in March, from 59.8 to 59.5. The index remains at decent levels, but we believe that the risks might be for an upward surprise due to improving weather conditions.

This week’s EMU bond supply is rather thin, coming from Germany, Spain and France. On Wednesday, the German Finanzagentur taps the on the run 5‐yr Bobl (€3B 1 % Feb2019). On Thursday, the French debt agency taps the off the run 15‐yr OAT (3.75% Apr2021), the on the run 10‐yr OAT (2.25% May2024) and the on the run 30‐yr OAT (3.25% May2045) for a combined amount of €6.5‐7.5B.
The Spanish treasury taps the on the run 5‐yr Bono (2.75% Apr2019) & 10‐yr Obligacion (3.8% Apr2024) and the off the run 15‐yr Obligaction (5.9% Jul2026). This week’s auctions will be supported by a €15B 3‐yr BTP redemption.

Overnight, most Asian equities trade positive amid weaker Japanese IP data and an FT article stating that China’s biggest banks more than doubled bad loan write‐downs last year. The US Note future trades flat, suggesting a normal opening for the Bund.

Today, the eco calendar contains the March EMU inflation number. Following last week’s releases on a country‐level, markets anticipate a low outcome. Nevertheless, volatility around the release can be expected, but we don’t think the Bund will break above Friday’s high even in case of a lower outcome. In the US, the Chicago PMI kicks off this week’s important data series. A stronger figure might set the tone for expectations further this week (ISM/ADP/NFP). A speech by Fed president Yellen is a wildcard.

Technically, the Bund set a minor new contract high (144.08) on Friday after dovish ECB comments, low inflation numbers and ahead of the ECB meeting. In the German 10‐yr yield, we are close to 1.5% key support. We believe these levels will hold this week even if the ECB eases monetary policy on Thursday. The main reason is that we expect strong US eco data. These could push the US 10‐yr yield back towards 2.8% resistance and even force a break higher. This should offset any impact of a potentially soft ECB.