US Treasuries underperform ahead of supply

Rates

Global core bonds had a mixed, low volume, trading session yesterday, the opposite of the day before. Now the German Bund traded sideways, while US Treasuries moved lower, before recouping some ground in later trading, when US equities fell temporary ower. Technical elements mostly drove the price action, as were some hawkish comments of Fed Williams overnight. Weak German production figures were ignored. The Bund auction went again badly, as it was technically undersubscribed, but left no traces in the overall German bond auction. The US 10-year T-Note auction, went very well, but met little response afterwards, also because US equities were moving again higher. In a daily perspective, the US yield curve shifts 2.4 bps (2-yr) to 4.6 bps (5-yr) higher. Changes on the German yield curve were minimal ranging from flat to -1.3 bps (30-year). On intra-EMU bond markets, yield spread changes versus Germany (10-year) are tiny with Greece (-19 bps) and Ireland (-2 bps) outperforming.

Attention for US claims and the BoE/FOMC Minutes

The US jobless claims are expected to remain fairly stable, with initial jobless claims expected at 274k (277K last week) and continuing claims at 2200k for the last week of September. Following the awful September payrolls, markets might be sensitive to an unexpected increase in claims. Regarding the BoE’s meeting, benchmark rate will remain unchanged (0.5%), despite some BoE officials already sounding somewhat more hawkish lately. It will be interesting what messages the Minutes will reveal. Also interesting are speeches of ECB’s chief economist Praet and US Fed Bullard, Williams and Kocherlakota. Additionally, the Fed will release the Minutes of its September meeting.

The Minutes of the September FOMC meeting will be interesting, even if the meeting was already followed by a press conference at which chair Yellen explained their decision not to start the tightening cycle. Global growth concerns and too low inflation apparently played the biggest role in the decision even as we think market volatility played a role too. How close was the decision in September? Interesting to know, but markets already now that since the Minutes, both global and domestic eco data disappointed profoundly, excluding a Fed move in October and probably even in December. In this respect Fed speakers may give more information than the Minutes.

However, the views of the three governors that speak today are well known: Kocherlakota (pleaded for more easing!), Bullard (hawk who said that the awful payrolls didn’t change his opinion that normalization should have started) and Williams (still in favour of a 2015 lift-off).

US (30-yr) and Ireland (15-yr) tap the market.

The Treasury holds today its a $13B 30-year Note auction. Ireland will tap the market by selling an expected €1B of its IRISH 2.4% May 2030 (15-yr) bond. It is the last tap of this bond and also the last issuance for the year. Current outstanding is €6.87B. Irish bonds fared well in past weeks, showing some spread narrowing versus Germany and only slightly underperforming Spain and Italy (which have of course higher spread levels). In ASW terms, the May 2015 trades with a positive spread of 39.5 bps. The bond offers decent relative value on the curve given some underperformance recently versus nearby sectors. Fundamentals are ok: strong growth, early repayment of a large part of IMF debt. Rating wise, S&P upgraded Ireland 1 notch to A+ in June.

Overnight, Asian stocks markets trade with negative bias, despite good gains in WS. up to 1% higher, outperforming WS yesterday evening. Chinese equities are up about 4% after a closure of a week, which is disappointing. US Treasuries trade overnight with a positive bias and the Bund opened higher on the worsening of the risk sentiment.

Today’s eco calendar is nearly empty (only US initial claims). Earlier this morning, the German trade surplus narrowed sharply as exports slumped in August (-5.2%). The Minutes of the BoE, ECB and the FOMC are always interesting literature,. We expect the ECB and BOE Minutes to be soft, but markets have already priced softness. The Fed speakers have recently spoken and thus shouldn’t be to influential. The 30-year US bond auction may weigh a bit on US Treasuries ahead of the auction, but some relief may follow the auction. Equities and commodities are on a weaker footing, suggesting that core bond may profit somewhat.

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.

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