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Global core bonds ended nearly unchanged yesterday. The Bund started on a strong footing following disappointing German factory orders, but the move lacked follow-through buying. A mixed stock performance and an empty eco calendar afterwards, morphed trading into up-and-down action near opening levels into the US close. A lackluster US 10-yr note auction caused a spike lower in the US Note future, but without further ado. Daily changes on the US yield curve ranged between +0.2 bps and -0.7 bps with the belly of the curve outperforming the wings. The German yield curve flattened slightly with changes varying between +0.9 bps (2-yr) and -0.8 bps (30-yr). 10-yr yield spreads vs Germany ended unchanged with Italy underperforming (+7 bps) after the Italian Treasury decided to print €8bn of a new 30-yr syndicated bond (demand in excess of €35.5bn).
Asian stock markets are mixed this morning. Korea and India outperforms. The former after returning from a 3-day public holiday and the latter after a surprise rate cut by the RBI. Japan underperforms. Fed chair Powell and vice-chair Quarles echoed optimism about the current state of the US economy. Core bonds hover sideways, suggesting a neutral opening for today.
Today's eco calendar only contains US weekly jobless claims which are expected to revert to normal levels after last week's distortion. The EC publishes its new economic forecasts. Significant downgrades shouldn't come as a surprise. The US Treasury sells $19bn 30-yr Bonds which could weigh on the Note future. Speeches by Fed governors Clarida & Kaplan and ECB governors Mersch & Constancio are wildcards. The Bank of England (see below) could impact bonds via the UK Gilt market in case of surprises. Overall, we hold a mildly positive bias for bonds today, but again within the well-known boundaries.
Last week's clear Fed signal suggests range trading for the US 10-yr yield between 2.49% and 2.78%. The German 10-yr yield tested the lower bound of the 0.15%-0.31% again. We expect sideways trading going forward with little reason at this stage to project upward breaks. On the other hand we also think that sufficient bad news is discounted at those levels, but messages coming from the January central bank meetings suggest unchanged policies from both, probably through the Summer.
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