The Italian debt agency taps the on the run 3-yr

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Yesterday, the Bund tested the downside in largely technical and uneventful trading. Somewhat stronger (second tier) production data from France and Italy were marginally negative, but the downside was rapidly exhausted. The Bund entered a sideways trading pattern into US dealings. Later in the US session, intraday losses were virtually recouped leaving German bond yields almost unchanged in the close. The Bund auction went okay. US Treasuries had a somewhat more difficult session. Their slide continued throughout the whole European morning and early US session. Also here, there was little on the calendar to guide trading. Positioning ahead of the 10-yr Note auction may have weighted. However, Treasuries already recouped some of the losses ahead of the auction which eventually went reasonably well. There was no relief rally as positioning for today’s 30-year bond auction started. Technically, we note the break of the 10-yr yield above 2.50% resistance. In the end, US yields rose by up to 3.8 bps, steepening the curve. In EMU bond markets, peripheral yield spreads widened for the second day in a row with Spain again slightly underperforming.

Also today, the eco calendar remains thin with only US jobless claims of potential interest. The ECB will publish its monthly report and Draghi is scheduled to speak in Milan. It’s Draghi’s first speech since taking important decisions last Thursday so he might talk about the new ABS program. Yesterday, ECB Praet said that banks reacted positively to the ECB’s plan to support the ABS market. So, Draghi might at this Eurofi forum again ask banks to fully support the ECB. We don’t think though that he will have more details to unveil at the press conference. The ABS program is still work in progress and he announced details would be unveiled at the October 2 ECB meeting. On the supply front, Italy (BTP ), Sweden (IL Bonds) and the US (30Yr Bonds) will tap the market.

In the week ending the 6th of September, US initial jobless claims are forecast to continue hovering around the 300 000 level. The consensus is looking for a limited drop from 302 000 to 300 000, we believe however that the risks are for an upward surprise due to the close of several casino’s, which might slightly lift claims. The week under review also included the Labour Day holiday, which might increase volatility in the figures.

The Italian debt agency taps the on the run 3-yr (€2-2.5B 1.15% May2017), 7-yr (€2-2.5B 2.15% Dec2021) and 15-yr (€1-2B 3.5% Mar2030) BTP’s. Over the past week, the bonds cheapened around 6-8 bps in ASW spread terms. Furthermore, Italian BTP’s managed to stage a comeback versus Spanish Bono’s as the Scottish referendum weighs on the performance of the latter. From that angle, more spread narrowing can be expected in the run-up to the vote.

In the US, the Treasury continued its mid-month refinancing operation with an uneventful $21B 10-yr Note auction. The auction stopped slightly above the 1:00 PM bid side and the bid cover was slightly below average. The bidding details showed especially strength in the indirect bid. Today, the treasury finalizes its operation with a $13B 30-yr bond auction.

Overnight, Asian equities are narrowly mixed amid a busy eco calendar. The RBNZ kept policy rates unchanged (see FX section), Australian employment data were unreliably (?) strong and Chinese inflation data softer than expected. US president Obama authorized the start of US airstrikes in Syria and the extension of bombings in Iraq to fight IS. The US Note future trades flat overnight and we expect a neutral opening for the Bund.

The eco calendar is empty apart from supply, US weekly claims and a Draghi speech after European closure. The latter is a wildcard for trading in case he offers more insights on the ECB’s new bond programmes (see higher).

Technically, the US Note future extended the downtrend that started on Monday and fell below the neckline of a short term double top (124-28). In yield terms, the US 10-yr yield took out 2.5% resistance . These breaks are technically relevant. In the run-up to the FOMC meeting (Sep 17-18), we believe there is more upward potential for US yields as we think that the Fed could deliver a slightly more hawkish message (indications on reformulating forward guidance).

The Bund corrected lower this week in lockstep with the Note future, a sign that markets priced out the Ukrainian risk premium. Yesterday, the downmove fizzled out. The technical picture remains bullish in contrast to the Note future. A break below 147.92 support (Bund) or 1.12% 10-year bond yield would change the short term fate of the Bund. For now, there are no indications for such a break.