Mostly stronger data, but core bonds hold on

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Yesterday, global core bonds traded initially higher despite stronger EMU PMI’s (business sentiment). After noon, they gradually fell due to above consensus US CPI and core CPI (second month in a row) and New Home Sales. The Bund eventually closed around opening levels, while US Treasuries moved again higher late in US dealings, helped by declining equities and a strong 2-yr Note auction. This left US Treasuries yields up to 5 bps lower, the curve bull flattening. The German yield curve barely changed with yields less than 1 bp changed from the previous close. The technical pictures of US bonds are deteriorating (in yield terms) with the 5- and 10-yr yield losing key support levels at 1.4% and 1.94% respectively. Technically, the sustained break lower, opens the path for a test of the cycle lows. In the intra-EMU market, 10-yr yield spreads changed very little with the exception of a 70 bps drop for Greece.

Today, the eco calendar contains the German IFO business climate indicator and US durable goods orders. ECB’s Liikanen and Fed’s Evans are scheduled to speak and Sweden (Bonds), Norway (Bonds) and the US (5Yr Notes & 2Yr FRN) tap the market. The ECB meets on the Greek ELA ceiling. After having increased for three consecutive months, the German IFO business climate indicator stayed broadly stable in February. In March, the uptrend is forecast to have resumed with the consensus looking for an increase from 106.8 to 107.3. We see however risks for an upward surprise, after the strong PMI’s yesterday and encouraging comments from the Bundesbank and Economy Ministry. In January, US durable goods orders rebounded by 2.8% M/M, mainly due to strength in aircraft orders, while the underlying picture remained poor. For February, another limited increase is expected in durable goods orders (0.2% M/M).
Durables excluding transportation are forecast to have increased by 0.2% M/M, following a flat reading in March. For the ex-transportation reading, we believe that risks are for a slightly stronger outcome following four months of very poor figures.

In the US, the Treasury started its mid-month refinancing operation with a good $26B 2-yr Note auction. The auction stopped through the 1:00 PM bid side and the bid cover was slightly above the past year’s average (3.46 versus 3.39).
Bidding details showed that it was once again the indirect bid, reflecting foreign investor demand, which boosted the auction. Today, the US Treasury holds a $13B 2-yr floating rate note auction and a $35B 5-yr Note auction. Currently, the 5-yr WI is trading around 1.365%.

According to sources, the ECB instructed Greece’s biggest banks to refrain from adding (short term) Greek government exposure. More specifically, the ECB puts their recent warnings on capping Greek T-bill holdings at Greek banks in a legal framework. Currently, Greek banks hold around €11B of T-bills, while the Greek government has a Troika-induced limit of €15B T-bill issuance (total amount outstanding). The new legal framework by the ECB would thus imply that Greek banks can’t cover this possible €4B shortfall if foreign investors don’t re-invest their maturing T-bills. It would be another blow to the Greek government’s short term liquidity situation with a €1.7B bill for wages/pensions (end of month) and a €0.45B IMF payment looming. On another level, the ECB already has an official cap on the amount of T-bills Greek banks can use for funding through ELA (€3.5B). Today, the central bank meets again on extending this emergency liquidity line.

Overnight, most Asian stock indices trade in positive territory despite late night WS weakness. The US Note future trades stable, suggesting a neutral opening for the Bund.

Today, the eco calendar contains the German Ifo indicator and US durable goods. We see risks for both on the upside of expectations, but think that the downside in core bonds is rather limited. Yesterday, Bunds and especially US Treasuries didn’t really suffer from eco data strength.

Technically, the US 5-yr and 10-yr yield fell below key support levels (1.4% & 1.94%), opening the way for a test of the cycle lows (1.15% & 1.64%). The technical picture for the Bund remains bullish even if this week’s correction lower would go somewhat further.