Market calendar again unattractive

Rates

Renewed equity weakness help US Treasuries erase losses

US Treasuries sold off during most of the session as risk-on sentiment and upcoming supply weighted, but a very well 10-yr Note auction and crumbling equities allowed US Treasuries to erase most intraday losses. In a daily perspective, US yields were 0.8 to 1.8 bps higher, the belly slightly underperforming.

The Bund was well bid in the morning session after a weaker opening; but followed US Treasuries lower during at the start of the US trading session. Losses remained limited though. In after-trading, when US equities crumbled, the Bund profited and rose again to 154.90, 50 ticks above opening levels. The last move came after the closure of the cash bond market. In a daily perspective, German yields were up to 2.1 bps (10-yr) higher, steepening the curve. Changes in the intra-EMU bond market were small with spreads slightly narrower. Greece outperformed (-31 bps). There were no eco data, while the 23-yr Belgian bond syndication and the US 10-yr Note auction went excellent.

Market calendar again unattractive

In the US the weekly initial claims are expected to be again a bit lower at 275K after an uptick last week. It is associated with a healthy job market. Deviations from consensus won’t have a major market impact. US Import prices are expected to be very negative in August, confirming the dampening impact of imports on inflation. These data won’t have a big impact on the FOMC meeting. The BoE meets, but no policy change is expected. For the first time though the Minutes of the meeting (a summary of the debate) will be immediately released. Bond supply is comes from Ireland and US (see below).

Ireland and US tap market

Today, the Irish treasury taps the on the run 15-yr IGB (2.4% May2030) for €1B. If they raise this amount, Ireland completed 83% of this year’s funding need. The bond trades rather rich on the Irish yield curve and didn’t really cheapen in ASW spread terms going into the auction.

Overall, we expect the auction to go well as Ireland still profits from positive momentum towards the ex-bailout country. Later today, the US Treasury concludes its mid-month refinancing operation with a $13B 30-yr Bond auction. Currently, the WI is trading around 2.95%. Yesterday’s $21B 10-yr Note auction went very well. The auction stopped about a basis point below the 1:00 p.m. bid side, and the bid/cover was solid. The buy-side demand was strong as well. The indirect bid was average, but there was a significant pick-up in the direct bid.

Today: Counting down to FOMC

Overnight, most Asian stock markets trade lower on the back of late night WS weakness. Japan underperforms, losing 2.5%. In China, inflation data were mixed (higher CPI 2% and lower PPI -5.9% Y/Y) and officials in recent days ordered financial institutions to step up checks and strengthen capital controls on all FX transactions. The US Note future trades sideways, but the Bund is still expected to open strong in line with yesterday’s after-market trading.

The eco calendar remains unenticing today with only weekly claims in the US. Earlier this week, the US Note future and to a lesser extent the Bund, were sensitive to risk sentiment. This could remain so today, but all in all, we expect that markets will start counting down to the September FOMC meeting this week, especially once US supply is out of the way. That could slow trading and slightly benefit the US Notes. Recent events put a September hike in doubt, but we still think that de Fed will hike its policy rate by 25 bps, even as uncertainty is understandably very high. Some underperformance of the front end of the US curve is nevertheless likely the next couple of days if more investors shifts in their expectations (markets currently attach a 28% probability for a lift-off). We become more neutral for the longer end and await the outcome of the Fed meeting before reconsidering installing new short positions.