Global core bonds reacted lukewarm to a strong payrolls reports

Rates

On Friday, global core bonds reacted lukewarm to a strong payrolls reports, that nevertheless showed some weaker details (flat average earnings, sharp decline participation rate). After the initial drop in Treasuries, short covering kicked in erasing half of the modest losses. Later on, increased tensions in Ukraine flared up giving Treasuries the opportunity to even close higher in the longer end of the curve. However, this surely doesn’t tell the whole story. The ongoing flattening in the longer end of the curve raises questions about what is exactly happening. The 30-yr yield already some time ago fell below a key 3.50% support level and on Friday, it was the 10-year yield that passed 2.60% support, but the major support here is 2.50%. The 10-year Bund yield tried to recapture the 1.50%, but in the slipstream of the price development in the US Treasury market, it fell back to close at 1.45%, confirming the downward trend. The Bund future closed at a new contract high of 144.80. Volumes in the US treasury market were very high (especially longer end) and moderate in the Bund market. The impact in the second part of the session of Ukraine was very clear in the safe havens gold and other precious metals, yen and Swiss franc. US equities showed intra-day volatility, but limited the losses and are still near highs.

Today, the eco calendar is thin with only the euro zone PPI inflation data and the US non-manufacturing ISM. The EU Commission will publish its Spring Economic Forecasts and Euro zone Finance Ministers meet in Brussels. UK Markets are closed in observance of May Day.

The euro zone PPI inflation data are still March figures and therefore somewhat outdated after the April CPI estimate. Nevertheless, PPI is forecast to have dropped by 0.2% M/M, while the year-on-year reading is expected to stay stable at -1.7% Y/Y. We believe that the risks remain for a downward surprise. In the US, the non-manufacturing ISM is forecast to show a further improvement in April, from 53.1 to 54.0, after dropping to a multi-year low in February. We believe that an upward surprise is likely. Also the EC economic forecasts will be interesting. In its Winter Forecasts, the Commission slightly raised growth expectations both this year and next. This year, EMU growth is forecast to increase by 1.2% Y/Y before picking up to 1.8% Y/Y next year, it will be interesting to see whether forecasts will be raised further. We will also keep a close eye at the inflation forecasts, currently at 1.0% for this year and 1.3% in 2015. A further downward revision might increase pressure on the ECB to act, but an upward forecast of growth would suggest no downward revision to the inflation outlook.

This week’s EMU bond supply is relatively thin. Austria kicks off tomorrow by tapping the on the run 5-yr RAGB (1.15% Oct2018) and 20-yr RAGB (2.40% May2034) for a combined €1.1B. On Wednesday, Germany launches a new 5-yr Bobl (€5B Apr2019) and on Thursday, Spain and Ireland tap the market. The Spanish treasury taps the on the run 3-yr Bono 2.1% Apr2017), the off the run 10-yr Obligacion (4% Apr2020) and the on the run 15-yr Obligacion (5.15% Oct2028). This week’s auctions won’t be supported by bond redemptions.

Overnight, most Asian equity markets trade with some losses. The Chinese non-manufacturing PMI improved slightly to 54.8 from 54.5 whereas the final figure of the HSBC manufacturing PMI was downwardly revised to 48.1 from 48.3. Most headlines are dedicated to escalation of the Russian conflict in Odessa on Friday. The US Note future trades a few ticks higher. The Japanese and UK markets are closed today which means that flows could be very thin.

The eco agenda contains the EC spring forecasts and the US nonmanufacturing ISM. We expect a stronger ISM but after Friday’s post payrolls market reaction, we think this will be ignored. The Ukrainian conflict and sentiment on equity markets will likely guide bond trading today.

We put our hopes for higher core bond yields on stronger US eco data. The past month that scenario (strong data) played out but higher yields remained absent (for now). Low EMU inflation/A potential ECB “QE” programme and the eastern Ukrainian conflict take bond markets hostage. Last Friday, the US 10-yr yield closed below the 2.60% mark and tested this year’s low (2.57%). The German 10-yr yield remains below 1.50% and reached a new low for the year (1.44%). It’s difficult to ignore these technical breaks and the momentum is clearly positive for bonds. US and European equity markets are so far undamaged by the latest uprising in east Ukraine. If they really correct lower, this could even further underpin bond markets.