Japanese curve is bear steepening
|Global core bonds ended near opening levels yesterday, with US Treasuries slightly outperforming German Bunds. US yields fell by 0.9 bps to 1.8 bps on a daily basis with German yields adding up to 1.6 bps (30-yr), steepening the curve. The marginal outperformance of US Treasuries came during US dealings and started after the release of a disappointing Chicago PMI (September). The regional business barometer fell back in contractionary territory (47.1 from 50.4) with production and new orders falling. A slightly better performance of US stock markets (+0.5%) didn’t change the tide. 10-yr yield spread changes vs Germany barely changed.
Asian stock markets gain up to 1% this morning. Chinese markets are closed from today until October 7 for National Holidays. The Japanese yield curve bear steepens for a second session straight. The 30-yr yield rises to its highest level since early June (0.42%). The BoJ announced in its October bond purchase plan to cut purchases for all conventional tenors longer than three years. Other news factors that influence the move are this morning’s very weak 10-yr JGB auction (worst since 2016) and the decision from Japan’s Government Pension Investment Fund, the world’s biggest pension fund, to consider currency-hedged overseas bond holdings as similar to domestic debt investments. The GPIF will thus be able to buy foreign debt beyond the 19% portfolio limit in its current mandate. The Bund and US Note future lose ground as well this morning.
Today’s eco calendar contains EMU inflation numbers and US manufacturing ISM. EMU (core) inflation is expected to stay well below the ECB’s 2% inflation target (both 1% Y/Y) with risks probably even tilted to the downside after yesterday’s German reading (0.9% Y/Y). We don’t expect any market reaction to the release, given that the focus currently is on activity data. The manufacturing ISM is expected to rebound from 49.1 to 50. We don’t expect the picture to brighten in the suffering production sector. The employment component will be closely watched with investors looking for whether or not Joe Sixpack will eventually be effected. ADP employment change (Wednesday), non-manufacturing ISM (Thursday) and payrolls (Friday) are still up for release later this week and might keep the market reaction guarded. Wildcards for trading are mostly politically related with developments in the US Democrats impeachment inquiry and in the Brexit process.
Technically, the German 10-yr yield and US 10-yr yield both rebounded away from August lows following ECB/Fed September policy meetings. Both fell short of really testing first resistance levels, respectively at -0.41% and 1.94%. Going forward, we expect range trading with August lows protecting the downside (German 10y: -0.73%; US 10y: 1.43).
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