Bunds move sideways near highs, US bonds down

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Bunds move sideways near highs, US bonds down

Yesterday, German Bunds had another dull trading session in the absence of key EMU eco data or other events and ahead of the Yellen’s speech today and the US payrolls on Thursday. Sideways trading dominated in the morning, while a gradually, sluggish rise in the afternoon session brought the Bund future to the contract high at 147.19. That was the sign for modest selling that drove Bunds back to near opening levels at the close. Price action in the US Treasury market was more interesting. In the European morning session, US Treasuries slid gently lower, probably on repositioning at the start of the new quarter. It was followed by somewhat more volatile sideways trading, with the US ISM, solid but near expectations, never was an item for trading. Even stronger US equities were initially ignored. Later on, US Treasuries made a final, limited move lower when equities continued to rise. US Treasuries closed with modest losses and yields up by 0.8 to 3.8 basis points, the curve steeper. The US-German 10-year yield spread widened to a new cycle high of 132 basis points.

Today, the eco calendar is fairly thin with the US ADP employment report, US factory orders and euro zone PPI inflation. Germany will tap the market (Bobl) and Fed Chairwoman Yellen will deliver a lecture at the IMF in Washington.

In June, the ADP employment report is forecast to show a pickup in private sector hiring compared with the previous month. The consensus is looking for an increase in private sector employment by 205 000, up from 179 000 in June. Recently, the ADP report always slightly underestimated the payrolls gains, a development which we expect to continue in June. Therefore, we believe that the consensus for the ADP report might be too optimistic as we expect the ADP report to continue its recent trend. US factory orders are forecast to have dropped slightly in May, following three consecutive monthly gains. The consensus is looking for a decline by 0.3% M/M, but after a poor durables report we believe that also the factory orders might come out somewhat weaker. In the euro zone, the PPI inflation data are fairly outdated following the June CPI data. The consensus expects the decline to slow in May, from -1.2% Y/Y to -1.0% Y/Y.

The German Debt Agency taps its 5-year benchmark OBL (0.5% November 2014) for an amount of €4B. It is the second tap of this bond that was first issued in late April. Outstanding volume is €9B. Due to the general decline in yields, the OBL Nov. 14 trades currently at 0.335%, the lowest level in more than one year, and is also close to the all-time lows at 0.21%. The general sentiment is bullish, but the low yield may be a hurdle, especially as these OBL auctions sometimes fail to entice sufficient demand.

Fed Chairwoman Yellen gives a lecture at the IMF. After the June FOMC meeting, she sounded at ease with the higher inflation (noisy) and financial speculation (no signs of fast increasing leverage). It was considered by markets as a green light on riskier assets. The S&P and Dow set new highs yesterday. We have no information about the subject of her lecture. It might or might not treat a market relevant theme. Recently, the Bank for International Settlement heavily criticized the ultra-accommodative monetary policy. The BIS urged central banks to include financial stability in their reaction functions to tame the destructive power of financial boom/bust cycles. The BIS said central banks greatly exaggerate the destructive power of deflation and use it as a justification for their easy policy stance. Will Ms. Yellen use the lecture to respond to the BIS? In what way? Brushing away these criticism or has the BIS report touched a raw nerve and is the lecture a start to inject into the markets more two-side risks towards the Fed policy? In the latter case, equities might sell-off and the yield curve may move.

Overnight, Asian equities trade with a bullish touch, after the S&P and Dow set closed at new records yesterday. The dollar is marginally stronger versus yen and euro. US Treasuries trade little changed. The Bund opened just below 147 this morning.

Regarding bond market today, we see downside risks to both the ADP and the factory orders, but we don’t expect them to have a big impact ahead of tomorrow’s US payrolls report. The lecture of Ms. Yellen is a wildcard (see higher).However, as her post FOMC remarks are still only two weeks old and no major development has taken place since, most likely it won’t have major impact on markets. So trading may be dominated by positioning ahead of the US payrolls and the July 4 holiday. So, in a daily perspective, bonds may be under slight downward pressure (also as the Bund is close to the contract high).

Technically, for US Treasuries, the Note future has lost its uptrendline, a small negative, but it stays above 124-22+/23+ (previous highs, ST support) Main support at 123-25 (previous low). The 10-year yield is near the key 2.46/40 support. A drop below would be technically very relevant. The Bund has broken above the upper bound on its sideways range and the 10-year German yield is below the 1.29% low. Concluding, the ST technical picture for the Bund is bullish, but the ST bullish picture of the US Treasury Note is under threat.