Payrolls: good, but not good enough: bonds cannot find firm direction
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On Friday, global core bonds initially lost ground on the back of suffering UK gilts. A close-to-consensus US payrolls report however triggered some profit taking on shorts especially in the US amid volatile trading ahead of the long weekend. Core bonds traded with a downward bias going into the US payrolls report. UK Gilts took the heaviest beating on the back of rising UK inflation expectations following sterling’s (flash) crash and closed 5 (2-yr) to 9.9 bps (10-yr) higher. The 5y5y UK forward inflation increased from 3.3% to 3.65% over the past weeks (see graph). US Treasuries managed to close the session slightly higher. The key technical yield resistances for 5- (1.27%) 10- (1.756%) and 30-year yield (2.5%) held. In a daily perspective, the German yield curve bear steepened with yields 0.5 bps (2-yr) to 4.9 bps (30-yr) higher. Changes on the US yield curve vary between -2.3 bp (5-yr) and -0.30 bps (30-yr). The outperformance of the 5-year reflects slight changes markets expectations for Fed policy going forward.
On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Spain outperforming (-3 bps) while Portugal underperforming (+3 bps) in the wake yesterday’s DBRS comments (worries about medium term outlook). The next review is scheduled in two weeks and a downgrade would exclude Portuguese bonds from the ECB’s QE programme.
US & Japan closed; calendar unattractive
Today, US markets are closed for Columbus Day., while also Japanese markets are closed. The presidential debate hadn’t a big immediate impact on markets. The Euro zone calendar contains only some second tier releases (French business sentiment, Italian and Greek production) that usually don’t affect overall markets. Euro area Finance Ministers meet in Luxemburg and will amongst other look at progress Greece made on its bail-out conditions. In the evening ECB Visco and Villeroy speak. Later this week, various central bankers (ECB/Fed…) speak with special attention for the speech of Yellen on Friday evening. The eco calendars is thin. In the Eurozone, the German ZEW on Tuesday and the production on Wednesday are up for release, but that aren’t strong market movers. The US eco calendar becomes only interesting on Friday with the US retail sales and PPI for September and Michigan consumer sentiment for October.
Busy supply calendar
This week’s scheduled EMU bond supply comes from the Netherlands, Austria, Ireland and Italy. Tomorrow, the Dutch debt agency taps the on the run 10-yr DSL (€1.5-2.5B 0.5% Jul2026). The Austrian treasury sells the on the run 10-yr RAGB (0.75% Oct2026) and 30-yr RAGB (1.5% Feb2047) for a combined €1.32B. On Thursday, Italy and Ireland hold auctions. Lines and amounts on offer still need to be determined, but in Italy it will probably be 3-yr, 7-yr and 15-yr BTP taps. This week’s auctions will be supported by a €16B German redemption and a €4B Portuguese one.
The US Treasury holds its mid-month refinancing operation on Wednesday with a combined $24B 3-yr Note and a $20B 10-yr Note auction. On Thursday, the US Treasury holds a $12B 30-yr Bond auction.
US absent and thin calendar: sentiment-driven trading
Overnight, Chinese equity markets outperform in a catch-up move following last week’s closure. Japan, Hong Kong and Taiwan are closed today and other stock markets trade rather mixed. The US Note future trades stable, suggesting a neutral opening for the Bund.
Today’s EMU calendar contains only second tier eco data and US markets are closed for Columbus Day, suggesting a range-bound, sentiment-driven Bund session.
Technically, key levels in US yield terms held after the payrolls (5-yr: 1.27%, 10-yr: 1.75%, 30-yr: 2.50%). The US Note future failed to break below the lower bound of the 129-26/130-01+ to 132-05 range. Ahead of Wednesday’s FOMC Minutes and Friday’s Yellen speech & US retail sales, we think that these levels will hold.
The Bund fell back in that longstanding range and dropped below the 164.29 level (minor support) which opens the way for a return to the range bottom at 163. Rumours about the end of an era of unprecedented monetary easing could become run-of-the-mill in the run-up to the October/December ECB meetings and cap the topside in the Bund market.
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