Core bonds erase post-payrolls gains

Rates

Global core bonds erased more post‐payrolls gains yesterday, as risk sentiment was very positive. US supply (end of month refinancing operation starts tomorrow) was an additional negative for US Treasuries. The eco data (services PMI’s in EMU, UK and US) were somewhat weaker than expected, but were blown away by the improving risk sentiment. Commodities couldn’t match the equity performance and gains weren’t convincing. Technically, both the German Bund (152.75‐156.84) and the US Note future (126‐16 – 129‐10+) fell back within their sideways ranges following Friday’s post‐payrolls break higher. We won’t draw final conclusions yet and consider the test still ongoing. Both the US and German yield curves bear steepened. US yields increased by 2.6 bps (2‐yr) to 6.9 bps (30‐yr) while German yield changes ranged between 0.7 bps (2‐yr) and +9.1 bps (30‐yr). On intra‐EMU bond markets, 10‐yr yield spreads versus Germany narrowed up to 3 bps for the periphery (Greece ‐19 bps). There was no specific out performance from Spain following Friday’s unexpected rating upgrade by S&P. Portuguese election, which resulted in a minority government for PM Passos Coelho, didn’t leave traces either.

Eco calendar less enticing: US trade & German orders

The US trade balance is expected to show a widening in the deficit from ‐$41.86B to ‐$48.00B. A sizeable drop in exports of goods is expected, partly due to a decline in oil prices, partly due to the stronger dollar. Given signals of slower growth, attention for the trade balance might be bigger than usual and so also the reaction on a consensus miss. Also on the agenda today is a speech by ECB president Mario Draghi in Frankfurt and speeches by Fed Williams and Fed George during US dealings. Williams talked recently, but we hope he’ll give his opinion on the payrolls. Fed George is a hawkish governor and we look out whether she’ll stick to that line given EM turmoil and disappointing payrolls. Any deviation to the dovish side would be market‐moving. ECB Draghi will likely echo his recent soft comments.

Austria taps market; US starts end-of-month refinancing

The Austrian debt agency taps the off the run RAGB (1.75% Oct2023) and the on the run 10‐yr RAGB (1.2% Oct2025) for a combined €1.3B. An additional 10% of the allotted volume will be set aside as a quota for the Bund. In the run‐up to the auction, the bonds on offer traded stable in ASW‐spread terms and they are normal on the Austrian yield curve. We expect a plain vanilla auction. Later this week, Germany (tomorrow) and Ireland (Thursday) complete this week’s scheduled EMU bond issuance. This week’s auctions will be supported by a €16B Bobl redemption. The US Treasury starts its end‐of‐month refinancing operation with a $24B 3‐yr Note auction. Currently, the WI trades around 0.89%. The auction will be followed by a $21B 10‐yr Note auction tomorrow and a $13B 30‐yr Bond auction on Thursday.

Today: More equity watching

Overnight, Asian stocks markets trade around 1% higher with Japan outperforming (+1.5%) and China still closed. All in all, gains are rather small given the stellar performance of Europe and the US yesterday. The RBA kept policy rates unchanged at 2%. The US Note future trades marginally higher.

Today’s eco calendar is thin with only the US trade balance. Normally, that’s no market mover, but given current global growth slowdown fears it could grab some more attention. US supply is marginally negative for US Treasuries, but we think that sentiment on equity markets will be the key driver for markets. After European closure, speeches by ECB Draghi and SF Fed Williams are wildcards.

After the dovish September FOMC meeting, we eyed a return to the contract high for the US Note future (129‐10+), but we didn’t anticipate a break higher. That last assumption was under severe pressure after disappointing payrolls, but ultimately it is back in the range as is the Bund. Therefore, we hold off setting up short positions until the dust has settled. Fed members confirming that a 2015 lift‐off remains the preferred scenario and is a possible trigger. Fed George (Tuesday), Williams, Bullard (Wednesday), Kocherlakota (Thursday), Lockhart and Evans (Friday) are scheduled to speak. For the Bund, the reasoning is similar. A break of the 10‐yr yield below 0.47% would make the technical picture bullish. The EMU calendar is uninspiring today.

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