Global core bonds had a quiet session

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Yesterday, global core bonds had a quiet session as neither EMU nor US (ISM) eco data were able to give clear direction. This resulted in sideways trading for German bonds with yields up about 1 bp across the curve. In the US, Treasuries had a similar quiet trading, but with some curve action. The US curve steepened with 2‐5‐yr yields up 1.2 bps, but 10‐and 30‐yr yields were up 3.4 to 4.8 bps. It was the reversal of last week’s flattening and probably some repositioning ahead of the upcoming US payrolls release.

Today, the EMU eco calendar is thin, but in the US the ADP employment report and factory orders will be released. Germany (Bobl) will tap the markets and EU Finance Ministers and central bankers continue their meeting in Athens. Fed’s Lockhart & Bullard are scheduled to speak. Both spoke recently and thus most likely won’t bring new insights. We retained that Lockhart sees the first rate hike in H2 of 2015 and Bullard early 2015. The latter is quite optimistic on eco growth and keeps a close eye on bubble risks. Lockhart is most concerned about persistent low inflation.

In the US, it will be interesting to see whether the ADP employment report shows signs of improvement in March, after the weather‐related slack in the previous months. The consensus is looking for a fairly robust 195 000 increase in private sector employment in March, up from an 139 000 increase in February. In the previous month, the ADP report was significantly weaker than the official BLS reading. Will there be some pick up in employment, as weather conditions improved in March? Anyway, it might be difficult to draw conclusions for Friday’s official payrolls report as the correlation between the two reports has been poor over the previous months. Factory orders are expected to have rebounded by 1.2% M/M in February, following poor readings in January and December. As also durables came out strong, we expect a similar rebound In factory orders, although the details might be weaker.

Today, the German Finanzagentur kicks off this week’s EMU bond supply by tapping the on the run 5‐yr Bobl (€3B 1% Feb2019). It’s the final tap of this bond and the relatively low amount on offer should be easy to digest. At the previous three Bobl auctions, total bids averaged €5.64B. On the 5‐yr segment of the yield curve, this bond trades cheap in ASW spread terms, which should be supportive for the auction. The Greek Minister of Finance announced that Greece plans to launch a 3‐to 5‐year bond by June. The news came after finance ministers announced that they would unlock the next €8.3B aid tranche to Greece. By the end of the year, Athens hopes to raise €4‐5B, which should help cover the 2014 funding gap. “We plan to start regularly tapping the long term bond market, not because we’re desperate for cash but because it builds momentum”, a senior official added.

Overnight, Asian equities trade positive and the US Note future is slightly lower. This points to slight risk‐on at the start of trading. At the end yesterday’s European session, ECB Constancio said the EMU will probably avoid outright deflation as a “soft” economic recovery gradually reduces spare capacity in the economy. He also added that the ECB expects the low inflation figure in March to be corrected to a high figure in April. Both factors suggest additional easing isn’t imminent, though the market didn’t react to them.

Today, all attention will go the ADP employment report. We don’t have a reason to distance ourselves from the (rather high) consensus. In case of a strong report, the US Note future could go for a new test of 123‐02+ support/2.8% resistance. The spill‐over towards the Bund market could be more limited with Thursday’s ECB meeting in mind.

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 tomorrow. The main reason is that we expect strong US eco data (ADP, non‐manufacturing ISM and payrolls still to come). 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.