First signs of fatigue in German Bund?
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Global core bonds lost ground yesterday. The US Note future and German Bund suffered a first downleg in Asian trading on bullish US-Sino trade comments. The second hit was inflicted by stronger-than-expected French PMI's. The Bund tried to stage a comeback after mixed German/EMU PMI's with a strong services reading slightly outweighing weakness in the manufacturing area. The Bund's failure to really gain on the outcome suggests that market positioning is stretched enough. No additional bad news might be good news from now on. Some investors decided to take some profit during the remainder of the session. From a technical point of view, nothing has changed yet with the Bund still north of first support (165.87) and the German 10-yr yield below 0.14%. Mixed US eco data didn't affect trading. The US yield curve bear steepened with yields adding 3.1 bps (2-yr) to 5.5 bps (30-yr). German yields increased by 1.4 bps (2-yr) to 3 bps (5-yr) with the belly of the curve outperforming the wings. Peripheral yield spreads vs Germany narrowed by 2 bps (Spain) to 5 bps (Italy).
Most Asian stock markets record small losses this morning with China outperforming (>+1.5%). Chinese vice PM Liu He meets with US President Trump today to conclude this week's trade negotiations. Core bond futures trade stable, suggesting a neutral start for today.
Today's eco calendar contains February German Ifo Business sentiment. Consensus expects a stabilization in both the current assessment and the expectations sub-indices. We side with consensus or even see some upside risks after yesterday's strong German services PMI given that this sector carries the most weight in the Ifo indicator. This will test our suggestion that no additional bad news is positive news for trading and can inflict some losses on the Bund. ECB President Draghi is scheduled to speak at a low key event. It's uncertain that he'll touch on monetary policy. An avalanche of Fed speakers gather at a Fed event in New York. Topics of debate are inflation, quantitative tools and the Fed's balance sheet. The tone will probably be dovish, but that shouldn't surprise. The Fed used lack of inflationary pressure as one of the reasons to explain this year's U-turn. This week's FOMC Minutes hinted at a March announcement on ending the balance sheet run-off by the end of the year. The US 10-yr yield remain stuck in a 2.49%-2.78% sideways trading range.
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