The Italian debt agency ends this week's scheduled EMU bond supply

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Yesterday, global core bonds had a rollercoaster ride that left them with good gains in the close. Technical considerations, test of the contract high for the Bund) and a rout of equities in the US session were behind intraday moves.
Bonds were initially supported by the dovish Fed Minutes and weaker equities. A test of the contract high in the Bund failed, and send bonds lower. Stronger US eco data weighed further on prices, but a rout in equities turned the fortunes for bonds again and left them with juicy gains in the close. US yields dropped between 1.2 and 5.5 bps, the curve nicely flattening. German yields fell 2.4 bps at the 2-yr tenor and 5 to 5.4 bps further out the curve. The US 30-yr yield tested major support at around 3.50%, while the German 10-yr is about to test the key 1.5% area.

The US eco calendar heats up with the PPI inflation data and first estimate of US Michigan consumer confidence. The IMF and World Bank will hold their spring meetings and the ECB will announce the amount of LTRO repayments. Earnings seasons gather pace with reports of JPM and Wells Fargo.

In March, US PPI inflation is forecast to have edged up slightly, by 0.1% M/M following a 0.1% M/M decline in February. The annual rate is forecast to pick up to 1.1% Y/Y from 0.9% Y/Y, slightly off its recent low. Core PPI, excluding food and energy, is forecast to have stabilized at 1.1% Y/Y. We have no reasons to distance ourselves from the consensus. The PPI data might give some indications for the CPI inflation data next week. In April, University of Michigan consumer confidence is forecast to edge up slightly following an unexpected drop in the previous month. The consensus is looking for a limited increase from 80 to 81. We believe that the risks are for an upward surprise as also Conference Board’s consumer confidence rose to a new high, while weather conditions improved and sentiment on financial markets was buoyant.

ECB Draghi repeated largely his comments made after last week’s ECB meeting when he spoke yesterday evening at the IMF conference. He said the recovery is ongoing and recent information is consistent with period of low inflation that should be following by a gradual increase of inflation towards target. Mediumto- long term inflation expectations are anchored and risks to inflation remain limited and mixed. The ECB will monitor exchange rate developments closely. He conclude that the ECB is resolute to act swiftly if needed and doesn’t exclude neither lower rates nor unconventional measures if needed. The ECB publishes today a ABS paper in a sign the ECB prefers to model QE on this asset class.

The Italian debt agency ends this week’s scheduled EMU bond supply. They tap the on the run 3-yr BTP (€3-3.5B 1.5% Dec2016), 7-yr BTP (€2-2.5B 3.75% May2021) and 30-yr BTP (€0.75-1.25 4.75% Sep2044). The bonds on offer didn’t cheapen much going into the auction. Positive sentiment towards the periphery remains a strong driver at PIIGS auctions. However, if European equity markets are under pressure today, and this spills over to EMU bond markets (wider spreads), it could dampen demand. In the US, the Treasury ended its mid-month refinancing operation with a good $13B 30-yr Bond auction. The auction stopped through the 1:00 PM bid side and the bid cover (2.52) was strong (2.38 average over the prior year). The bidding details were a little below average overall. Today, the treasury end its refinancing operation with a $13B 30-yr Bond auction. The dealer bid was about average, but the indirect bid was good and the direct bid was small but aggressive.

Overnight, S&P affirmed the Finnish AAA-rating but lowered the outlook from stable to negative citing in particular Finland's protracted economic stagnation as a reason for the downward revision. Fitch affirmed the Portuguese BB+ rating, but revised the outlook from stable to positive. A stronger fiscal position, improved financing conditions and the economic recovery are beneficiary elements for Portugal.

Overnight, Asian equity indices trade with losses, copying the WS correction though to a slightly lesser extent. The US Note future trades flat overnight. The Bund opened somewhat lower, but trades now in line with late US trading levels. Weak European equity market opening is likely and might still give the Bund some upward bias. .

Today, the eco calendar remains thin with only Michigan confidence. Nevertheless, it could be an interesting trading session. The German 10-yr yield arrived at the lower bound of the 1.5-1.7% trading range, which is also 62% retracement from last year’s May-September up-leg. In the US, the 10-yr yield is near the lower bound of the 2.6-2.8% range (key support 2.45%), but (technically) more important is the 30-yr yield. Another test of 3.5% key support (38% retracement) is ongoing. Sentiment on equity markets will be key. A technical correction, tensions in Ukraine/Russia and JP Morgan/Wells Fargo earnings are all important potential drivers in this respect. If yesterday’s sell-off correction continues, support levels (in yields) will be under pressure. We don’t anticipate a sustained break, but we raise our awareness level.