FOMC meeting main focus: Tweaking statement

Rates

German 10-yr yield closes in on 0.33% resistance

The story of yesterday’s trading session was similar to the day before. Global core bonds lost ground despite intraday weakness on equity markets, a more or less stable oil price and disappointing eco data (US durable goods orders). German Bunds underperformed US Treasuries again during the process, confirming recent Bund weakness. In first instance, we target more losses towards 160.81, the March low. In yield terms, the technical picture only changes in case of a break above 0.33%. That’s the neckline of a double bottom (see graph) with targets at 0.56% and 0.58%.The US 5‐year Note auction was ordinary. The US eco data were neutral to downbeat. Durable orders and consumer confidence disappointed, while the Richmond Fed survey and the Markit service confidence were close to expectations. However, it couldn’t help US Treasuries in a lasting way The outperformance of US Treasuries was also due to tomorrow’s FOMC statement which kept many investors sidelined and weak durable goods orders which caused a temporary uptick.

In a daily perspective,, the German yield curve closed 0.8 bps (2‐yr) to 3.6 bps (10‐yr) higher. Changes on the US yield curve varied between 1.5 bps (10‐yr) and +3.1 bps (2‐yr; benchmark change). On intra‐EMU bond markets, 10‐yr peripheral yield spread changes versus Germany were 3 to 4 bps (Italy/Spain) with Portugal outperforming (‐12 bps). After closure, the King announced that new elections will be held on June 26.

 

FOMC meeting main focus: Tweaking statement

In March, growth in EMU M3 is expected to have stabilized at 5.0% Y/Y, for a 2nd straight month, but more attention will go out to the lending data. Lending to households accelerated last month led by lending for house purchases, but lending to non‐financials remained quite slow. We expect this trend to continue in March, but in the coming quarters it will be interesting to see whether the latest ECB’s measures will boost lending further. Markets will only look to the UK Q1 GDP, the first developed country to report Q1 GDP results.

No policy change is expected when the FOMC closes its meeting later today. However the statement may be changed a bit as the financial situation improved and the global economy shows fragile signs of improvement. As the Fed projected in March two rate increases this year and the market doesn’t even discount one, the FOMC may try to push market a bit closer to its own “expectation”. That may be done by re‐inserting the “balanced risk” assessment in the statement (see KBC FLASH).

 

Ordinary US 5-yr Note auction

The German Finanzagentur starts this week’s scheduled EMU bond supply with tapping the on the run 30‐yr Bund (€1B 2.5% Aug2046). The Bund didn’t cheapen in ASW‐spread terms in the run‐up to the auction, but trades normal at the very long end of the German yield curve. Total bids at the previous 5 30‐yr Bund auctions averaged €1.27B and we don’t expect much improvement today.

The US Treasury continued its end‐of‐month refinancing operation with a an ordinary $34B 5‐yr Note auction. The auction stopped with a small tail, which is not unusual for a 5‐yr and the bid cover was slightly below average (2.41). Bidding details showed very strong indirect bids, reflecting foreign investor demand. The Treasury ends its refinancing operation tomorrow with a $28B 7‐yr Note auction and a $15B 2‐yr FRN auction.

 

Fed-statement slightly negative for US Treasuries?

Overnight, most Asian equity markets trade mixed to slightly lower with Japan underperforming (‐0.5%). Apple results disappointed and weigh on sentiment. Brent crude trades north of $46/barrel, but the US Note future (higher) plays the equity rather than the oil card. Therefore we expect a somewhat higher opening for the Bund.

The focus of today’s trading is the FOMC statement. In the run‐up to the release, risk aversion could be somewhat positive for core bonds, but we expect that most investors will remain side‐lined. The Fed could slightly tweak its statement (see flash) which is minor negative for US Treasuries. Sentiment towards Bunds deteriorates further. This week, they lost ground despite correcting equities (lower) and disappointing eco data. We think that momentum will remain negative. The announcement of the Spanish elections is no big surprise and therefore the impact on Spanish bonds shouldn’t be large.

Technically, the US Note future trades below 129‐26 support. We would short US Treasuries and aim for return action lower (next support at 128‐ 01+) as US markets are too dovish positioned. We also hold on to our sellon‐ upticks approach in the Bund. The drop below 163.16 suggests return action to the March low (160.81). In yield terms, the German 10‐yr yield could easily advance further towards 0.33%. We “fear” that the ECB has no (or limited) tools left to ease policy further and a sudden correction like this time around last year could be around the corner.

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