Mixed performance core bonds in quiet trading

Rates

Global core bonds had a rather uneventful session, as the equity rally fizzled out and the few eco data were largely ignored. The Bund traded with a downward bias throughout the session though while the US T-Note future held a narrow sideways trading range. At 4 pm CET, the IMF published its quite bleak outlook which pushed Bunds and US Treasuries temporary higher. The US 3-yr Note auction was ok, but didn’t affect the global market. In a daily perspective, the German curve bear steepened with yields up between 1.1 bp and 3.4 bps. The US yield curve bull flattened with yields down between 0.4 and 2.8 bps. Peripheral yield spreads widened 1 to 2 bps. Greece continued to outperform (-17 bps).

There are no market moving items on the economic calendar today. German production has been published this morning (see headlines). The US Treasury holds its 10-year T-Note auction and the German Finanzagentur taps the 10-yr Bund. (see below).

Fed Williams still sees lift-off

San Francisco Fed Williams repeated, now after the awful payrolls, that it still makes sense for a Fed rate lift off in 2015. He argues that the US needs at most 100 000 jobs a month to keep unemployment near the full employment NAIRU (where it is now according to Williams). Of course, he is in favour of a gradual tightening of policy (most gradual ever) after the lift-off. Williams is not worried that markets aren’t totally convinced of the timing of the lift-off, but it shouldn’t be the case that no one is expecting a rate increase. So, the Fed should communicate its views well enough that markets are not taken by surprise by an eventual rate hike. He sees overall no fundamental shift in the global outlook and is bullish on China. Williams sees some signs of domestic inflation pick-up, but is not worried about inflation. Other imbalances may be building. Normal market volatility doesn’t bother him. According to Williams, the Fed’s QE holdings keep 10-yr yields 1 to 1.25% lower than otherwise. Summarizing, Williams still thinks a 2015 lift-off is appropriate, but we will listen closely to other governors, especially those of the board and the communication of the Fed leadership (Yellen/Fischer).

Germany and US tap 10yr bonds

The German Finanzagentur taps the on the run 10-yr Bund (€4B 1% Aug2025). Total bids at the previous 5 Bund auctions averaged only €4.06B and we don’t expect much improvement today. Year to date, the German Finanzagentur completed around 75% of this year’s expected funding need.

In the US, the Treasury started its end-of-month refinancing operation with a $24B 3-yr Note auction which went well enough overall. The bid cover was the smallest since August 2014, but the auction stopped firmly through the 1:00 PM bod side. Bidding details showed that particularly the direct bid was good.
Today, the Treasury continues its refinancing operation with a $21B 10-yr Note auction. Currently, the WI is trading around 2.06%.

Today: Cautious sell-on-upticks

Overnight, Asian stocks markets trade up to 1% higher, outperforming WS yesterday evening. The BoJ kept its policy unchanged and for now thus abstains from easing its policy further. SF Fed Williams sounded hawkish (see above) and the US Note future trades marginally lower.

Today’s eco calendar is completely empty apart from the auctions mentioned above. Earlier this morning, German production data for August disappointed. Apart from risk sentiment on equity markets, commodity prices could be important for core bond trading as they show signs of bottoming out (e.g. Brent oil price above $52/barrel). A further recovery is a negative for core bonds. The US supply (10yr & 30yr taps ahead) could additionally weigh at the long-dated US Treasuries.

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 both the US Note future and the Bund are back in the ranges. We prefer to install a cautious sell-on-upticks approach around current levels for return action to the lower bound of the established ranges. Fed Williams’ recent comments suggest that the Fed could/will do some more communicating to publicly endorsing a 2015 lift-off. In this respect, FOMC speeches will be closely monitored.

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