Consolidation on overbought core bond markets?
|Rates Easter holidays have passed: A round up.
Recapitulating pre-Easter trading: geopolitical risks (Syria and North Korea), French presidential election fears and doubts about US president Trump's ability to implement his pro-growth, pro-deregulation agenda after failing to get Obamacare repealed in Congress, drove core bond trading. The survey data started to lose their post-Trump shine on disappointment. The US Treasury will by the end of April again face the debt ceiling issue and there are only a few days left to muster an agreement about a continuation resolution through Congress. Last but not least, US president Trump talked the dollar down and reversed course on monetary policy, by saying he liked an easy policy stance and might still decide to keep Ms. Yellen as a chairwoman when her term expires.
Especially the reaction on Trumps' comments was significant in the bond market as they pushed the 5- and 10-yr Treasury yields well below key yield support at respectively 1.80% and 2.30% The US 30-yr yield tests 2.90%. The German 10-yr yield extensively tested the key area around 0.20%, but no clean break occurred yet.
US Housing starts & permits and production in focus
March housing data are forecast to show a mixed picture. Starts are expected to have dropped 3% M/M to 1250K (annual rate) following a similar increase in February, while permits are expected to have risen modestly by 2.8% to 1250K following a 6% M/M drop in January. That would keep starts and permits near the cycle highs. The upward trend isn't broken, but signs of some moderation become gradually visible. Industrial production is expected to have rebounded in March, rising by 0.4% M/M from an upwardly revised 0.1% M/M in February. However, the lion part of the gains will be in the weather-related utility output, which fell sharply in previous months on unseasonably warm weather. Mining is doing well, but following outsized gains in February, there may be some payback. The more cyclical manufacturing output is expected flat in March after a strong 0.5% M/M in February. The decline in manufacturing hours worked and a slight weakening in activity surveys suggests only a small gain. All in all, the data won't have too much market impact.
Germany, France and Spain tap market
This week's scheduled EMU bond supply comes from Germany, Spain and France. The German Finanzagentur taps the off the run 30-yr Bund (€1B 2.5% Aug2044). On Thursday, the French treasury taps the on the run 3-yr BTAN (0% Feb2020) and 5-yr BTAN (0% May2022) for a combined €4.5-5.5B. Additionally, they sell three inflation-linked bond for a combined €0.75-1.25B. The Spanish debt agency taps the on the run 5-yr Bono (0.4% Apr2022), 10-yr Obligacion (1.5% Apr2027), 30-yr Obligacion (2.9% Oct2046) and off the run Obligacion (6% Jan2029) for a combined €4.5-5.5B.
Consolidation on overbought core bond markets?
Overnight, most Asian stock markets gain some ground but risk sentiment is less ebullient than in the US yesterday.
The US Note future and Brent crude trade stable. The German Bund could still open somewhat lower though, catching up with US Treasuries' price action yesterday. Last week's risk aversion pushed the US 5- and 10-yr yield below key support levels (respectively 1.8% and 2.3%) while the test of German 10-yr yield support (0.2%) is ongoing. Geopolitical concerns (North Korea & Syria) and French presidential elections (1st round on April 23) probably prevent return action (higher yields) this week as the eco calendar is irrelevant for trading apart from Friday's euro area PMI's. However, both the Bund and US Note future entered overbought conditions, suggesting that the core bond rally could lose some steam. We expect consolidation around current levels.
Our medium term strategy remains that US yields will recapture lost support levels and turn higher in the old trading bands as the Fed prepares another rate hike in June and starting to run-off its balance sheet before the end of the year.
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