Ebullient stocks insufficient for real profit taking in Bund

Rates

Global core bond trading took a dull start amid an empty eco calendar. Equity market sentiment was ebullient but it wasn’t enough to trigger profit taking in the overbought Bund. In a daily perspective, changes on the German yield curve ranged between -1.3 bps (30-yr) and +0.4 bps (2-yr). On intra-EMU bond markets, Greek bonds remained under downward pressure. The 10-yr yield spread added 39 bps. The government decreed that local authorities need to transfer public sector funds to the central government given the urgent need for cash. Unlike last Thursday and Friday, there little spread changes in Spain (+1 bp), Portugal (-1 bp) and Italy (+1 bp). The US trading session wasn’t exciting either. New York Fed Dudley repeated that he is hopeful that weakness in Q1 won’t last. He hopes to raise rates later this year. Dudley also again mentioned that how financial markets react to changes in Fed policy will affect how fast or slow rate increases happen. His estimate for a neutral rate over time is 3.5%. Changes on the US yield curve were somewhat more outspoken, varying between +0.8 bps (5-yr) and +4.3 bps (30-yr).

Stronger ZEW?

Today, the eco calendar remains empty in the US, while in the euro zone only the German ZEW indicator and outdated government debt/GDP ratio (2014) will be released. ECB’s Nouy (regulator) is scheduled to speak. In April, the German ZEW indicator is forecast to extend its improvement, which if confirmed would be the sixth consecutive increase. The consensus is looking for a limited improvement from 54.8 to 55.3, but we continue to see upside risks. European shares continued to rise recently and also most eco data showed further signs improvement, boding well for sentiment in April.

Fed Rosengren wants to change inflation target

The FT reports that Boston Fed Rosengren wants a debate on the FOMC meeting about whether the Fed’s 2% inflation goal is too low. “As we learn more about the real interest rate potentially being lower, we may at least want to have a broader debate about whether we have set the inflation targets too low.” Apparently, he floated the idea in a speech last week. He said that if the inflation target was set higher, it would mean a higher long run policy rate which would mean a bigger cushion to cut rates before hitting the zero lower bound.
Rosengren is one of the most dovish governors on the FOMC board.

Today’s Strategy

Overnight, most Asian equity indices build on yesterday’s bullish sentiment in Europe and the US with China and Japan outperforming. The US Note future trades marginally higher though.

Today’s EMU eco calendar remains thin with only German ZEW-indicator.
Risks are for a stronger outcome. Together with overbought conditions, this should be able to trigger some short term profit taking in the Bund. There are no signs that a downward correction will go far though. Current market themes (elevated risk of ST Greek default, dovish ECB stance, delay FOMC lift-off, stock market correction?) and the bullish technical picture suggest even more gains for the Bund. On the supply front, the EFSF launches a new 10-yr bond via syndication (Apr2025).

The US calendar is empty. Sentiment on stock markets could be the most important driver for US Treasuries. Technically, the US 10-yr yield approaches 1.82% support.