Core bonds end the week in tranquility

Rates

Global core bonds (and most other assets) made some intraday gyrations, but couldn’t really gather a strong directional momentum. US Treasuries were exception to the rule, as they gained some ground on an unrevised Q4 GDP (2.2%). Michigan consumer sentiment couldn’t seduce traders at the end of the week to put big bets. We suspect that end-of month and end-of-quarter extension buying helped the longer end with yield declines varying between -1.5 bps and -3.9 bps, flattening the curve. In a daily perspective, European bonds underperformed with yields less than 1 bp lower throughout the curve. In the intra-EMU bond market, the correction of Italian and Spanish 10-yr spreads continued with a 4 bps widening.

The eco calendar is interesting today with the first estimate of German HICP inflation for March. In February, inflation picked up from -0.5% Y/Y to -0.1% Y/Y. For March, a return to positive territory is expected with HICP inflation forecast to pick up from -0.1% Y/Y to 0.1% Y/Y (up 0.5% M/M), probably boosted by the early timing of Easter. Oil prices were generally somewhat lower in March. We still see risks for an upward surprise, boosted by strong domestic activity. Also in the euro area, European Commission’s economic confidence is forecast to increase for a third straight month in March. The consensus is looking for an increase from 102.1 to 103.0, but we believe that a bigger increase is likely following strong PMI’s indicators. In the US, personal income is expected to have increased by 0.3% M/M in February, following similar increases in December and January. Spending is expected to have picked up slightly, by 0.2% M/M, following two consecutive monthly declines. Markets might however be more interested in the inflation measures. The core PCE is expected to have increased by 0.1% M/M, which should keep the annual reading unchanged at 1.3% Y/Y. We believe that the risks might be for an upward surprise.

Greece is expected to present its reform plans. It worked during the weekend with the technical teams of the creditors, as time is running out and the Easter holidays may delay talks. In the meantime, deposits are fleeing out of the banks. While parties will most likely reach an agreement, chances of a near term default are more than negligible, as a €450M payment to the IMF is due April 9. The remaining €7.2B of funds of the current programme won’t be disbursed before end April. Furthermore, the ECB continues to limit ELA to a strict minimum and prohibits Greek banks to increase their exposure on the Greek sovereign. The Greek government is scrapping money out of all kinds of funds, but will it be enough? Fitch cut the Greek rating to CCC from B previously.

In a speech Friday eve Fed chairwoman Yellen downplayed the importance of the lift-off, putting more emphasis on the interest rate path the Fed might follow. While progress on the Fed’s price stability has been notably absent, she stressed that low inflation was likely the result of transitory factors. Therefore, it was not necessary for a significant pick-up in core inflation for the Fed to hike rates, neither was it indispensable for there to be be a jump in wage growth. She would however be uncomfortable about hiking if wage growth, core inflation or other inflation indicators were to weaken or if inflation expectations were to drop a lot further. However, in her speech she in particular spoke about the road map for what happens after the liftoff. Here she sounded very dovish and brought some new arguments to go slowly and be prepared to pause or reverse if needed. “It is sobering to note that many market participants appear to assess the risks to the outlook quite differently. They place considerable odds on adverse scenarios that would necessitate a lower and flatter trajectory for the Fed funds that envisioned in the Fed’s projections.” She offered a long list of reasons for caution at the Fed about raising rates too early or aggressively from zero.

The Italian debt agency taps the on the run 5-yr BTP (€1.5-2B 1.05% Dec2019) and 10-yr BTP (€2-2.5B 1.5% Jun2025). Both bonds cheapened in the run-up to the auction but the Jun2025 is still rich on the Italian curve. Overall, we expect that the relatively low amounts on offer will be easily digested. Additionally, the Italian treasury raises €2-3B with a new 7-yr floating rate note.

Overnight, Asian stocks trade positive with China outperforming. PBOC governor Zhou Xiaochuan said that policy makers would have to be vigilant against the risk of disinflation and that China has room to act. Japanese industrial production data were weak, but ignored. The US Note future trades stable, suggesting a neutral opening for the Bund.

Today, the eco calendar is well-filled. Risks for eco releases are tilted to the upside of expectations (see above). Especially US inflation data will be closely watched and have the potential to impact markets. Higher inflation should keep US yields above key levels (1.4% 5yr & 1.94% 10yr). Any reaction might be hampered by end-of-month/quarter extension buying though. Greece remains a factor of uncertainty as talks on the reform list again prove to be very difficult. The ECB announces the amount of assets purchased. We suspect they will continue to have bought the amount necessary to get their target of €60B/month. This shouldn’t impact markets. The technical picture for the Bund remains bullish.