US Treasuries slightly higher despite strong US equities

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US Treasuries slightly higher despite strong US equities

Yesterday, global core bonds started again with a minor upward bias, just like the previous two days. Weaker German and French PMI’s explain the better performance in the morning session, together with weaker equities. As the US session got going, the Bund headed back towards the intraday lows though.
Eventually, no further harm was caused. The Bund stopped declining and lingered in a tight sideways range for the remainder of the session. US Treasuries attempted a rally. While it didn’t go far, they still closed with modest gains. In a daily perspective, German bonds were flat to marginally lower in the 2-10-year sector and about 2.5 bps higher at the very long end. In the US, yields fell between 0.8 (2-yr) and 2.8 bps (30-yr), outperforming the German ones.
The US Treasury performance came against the background of (slightly) weaker initial claims and New Home sales, but despite rather strong equities. US equity gains were modest to moderate, but with a new all-time closing high for the NASDAQ and a new intra-day high for the S&P.

Will Greece get more time?

On intra-EMU bond markets, Greek bonds outperformed (10-yr yield spread -55 bps). The ELA amount was raised on Wednesday and EC Dombrovskis said that the EU is ready to reach an agreement. It’s up to Greece to meet EMU conditions. He doesn’t expect a breakthrough at the Riga Eurogroup meeting though.

IFO check-up for weaker German PMI’s

Today, only the German IFO business climate indicator and US durable goods orders need attention. In April, the German IFO business climate indicator is forecast to have increased for a sixth consecutive month. The consensus is looking for a limited increase from 107.9 to 108.4, but after yesterday’s PMI’s, we believe that the risks are for a downward surprise. Apparently, the weak euro is overshadowed by the poor global economic climate. In the US, durable goods orders are forecast to show a limited rebound, by 0.6% M/M following a 1.4% M/M decline in February. Part of the strength should be based in the transportation sector, but also durables ex transportation, are expected to have increased, which if confirmed would be the first rise in six months.

Today’s Strategy

Overnight, Asian equity markets trade mixed with Japan and China (rumours about a possible transaction tax) underperforming. The US Note future trades stable.

Today’s eco calendar contains German Ifo and US durable goods. Risks for the Ifo are on the downside of expectations. That’s a positive for the Bund. Greece remains a wildcard. Today, the Eurogroup meets in Riga. While a deal on the final €7.2B aid tranche is not expected, both parties seem to be willing to agree at least on some sort of blueprint/interim deal. In the sidelines of the meeting, German Chancellor Merkel and Greek PM Tsipras also meet. However, despite this “constructive” messages we don’t think that investors will be eager to front run on a deal. Cautiousness ahead of the weekend/meeting is more likely in this respect and should also underpin demand for the Bund. Similarly, equity weakness shouldn’t surprise us after the tumble of Asian stocks.

Technically, the Bund hit first support at 159.13 in this week’s corrective profit taking move. The uptrend is still firmly in place though. Even a break below 159.13/02 won’t change that. Only a break below the trendline (now at 157.89) would change the ST technical picture to neutral. That would be a tough nut to crack though as we hold our hypothesis that the ECB’s QE-programme mechanically holds EMU bonds yields down.

For the US, we side with consensus for the durables. The earnings calendar is thin today. Stock markets remain a potential market driver, though the correlation was loose yesterday. Technically, the US 10-yr yield trades sideways within the 1.82%-2.01% range since mid-March. We expect no break at least until next week’s FOMC meeting.