Calmness in Bund market, but pressure on periphery

Rates

Yesterday, core bond trading was quiet on this side of the ocean. The Bund’s initial attempt to rally failed and it lingered near opening levels for the remainder of the day. Renewed concerns about Greece and rumours Fitch would downgrade European banks may have supported the Bund in typical Monday light dealings. There were no eco releases in EMU, neither important central bankers comments. The Bund ended official trading at 153.51, a negligible 5 ticks gain from Friday’s close. European equities held up well with the exception of Italy. In yield terms, the longer end ceded some ground, steepening the curve, driven by the US Treasury sell-off. The Belgian auction was ok, but a lack of real money demand caught the eye. The 30-year yield was up 4 bps. Peripherals fared badly. Concerns about a Greek default weighed with 10-year yield spreads up to 10 bps higher (Portugal/Italy) and 54 bps for Greece. The Greek 2-year yield jumped 3% to 23.5%, showing increased default risk.

US Treasuries bear steepen without hard news

In the US, the bond rout resumed, following two constructive sessions on Thursday & Friday. The NAHB homebuilders’ sentiment deteriorated unexpected, but was no item for trading. The sell-off started in early dealing and continued until the close. The curve bear steepened with yield increases of 4 to 10 bps. Some referred to comments of Fed’s Evans early in the European session, but we saw nothing in his comments that could have triggered the sell-off. Corporate issuance was heavy though (rate lock activity) and some technical levels were broken, but shaky overall sentiment on bonds looks the main raison for the resumption of the sell-off. Strangely, US Equities advanced with both the S&P and Dow setting new all-time highs, not a sign of a risk-off day.

Eco calendar remains thin

In April, the German ZEW indicator weakened unexpectedly, falling from 54.8 to 53.3 and ending its 5-month uptrend. For May, a further decline is expected, from 53.3 to 49.0. We believe that the risks might be for a weaker outcome. In the euro area, the final reading of HICP inflation for April is expected to confirm the first estimate. Also the core reading is expected to confirm the first estimate (0.6% Y/Y). An upward surprise is not entirely excluded. In the US, both housing starts and permits are expected to have increased in April, supported by more favourable weather conditions. Housing starts are forecast to have risen for a second straight month in April, by 10.2% M/M to a total of 1 020 000, recovering from the weather-related slack. Building permits, on the contrary, are expected to show a more moderate rebound in April, by 2.3% M/M. The bar is quite high, but we continue to see upside risks.

Today’s Strategy

Overnight, Asian stock markets trade mostly positive. Chinese stocks outperform. China published a financial reform plan that missed though details; The Greek PM and FM both suggest that they are close to a deal with their creditors and expect a deal next week. The Minutes of the RBA were less soft than expected as they showed that the RBA hesitated at their meeting to cut rates (which they ultimately did).

Today, the calendar remains a bit thin. The ZEW analysts and investors sentiment survey may disappoint (see higher), which in principal is positive for the bonds, but markets usually doesn’t react much unless it would be a huge surprise. In the US, the housing data should bring good news, a bond negative, but also here they aren’t strong market movers, even if they may eventually give the existing sentiment a push in the back (if it goes in the same direction). The equity sentiment looks good with S&P and Dow both setting new highs and are followed by generally positive sentiment in Asia.

The Bund stabilized in recent sessions following the sell-off, but there is no firm signal that the sell-off is over yet. A move above 154.97 (38% retracement would make the picture more bullish, even as a near term low seems in place. An agreement with Greece could send the Bund for a renewed test of the 151.44 sell-off low. Yesterday, we believed a new short term equilibrium might have been found and looked for confirmation the big repositioning on the bond market is over for now. The Bund market didn’t disappoint us, but the sell-off in the US Treasury market took us by surprise and suggests that sentiment remains shaky and volatile.

In yield terms, the US 10-yr yield tested this year’s high at 2.30% (neckline huge double bottom; targets are 2.78% & 2.97% i.e. full retracement from decline since 2014). A sustained break didn’t happen, but yesterday’s sell-off suggest another test may follow. We suspect a 2-to-2.30% broad range will reign for now. The German 10-yr yield tested the 0.77% sell-off high, but it held. We are looking for signs that this level will be the ceiling for near term trading and look whether yields go lower again. Bund future (YTD): tries to move away from lows, but move above 154.97 is