The Netherlands and US tap bond market
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Cease-fire on bond markets, ahead of elections
Global core bonds recouped a small part (US)/the majority (Germany) of opening losses in an uneventful trading session. The FBI's decision to take no action against presidential candidate Clinton over new emails initially caused an improvement in risk sentiment at the start of the session. While equities and the dollar managed to hold on or even expanded gains. Core bonds recovered slightly, but eventually closed near opening levels. The second tier eco calendar didn't impact trading. In a daily perspective, the German yield curve bear steepened with yields 0.5 bps (2-yr) to 2.4 bps (30-yr) higher. Changes on the US yield curve varied between +3.5 bps (2-yr) and +5.5 bps (5-yr).
On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed up to 4 bps with Greece (-35 bps) and Portugal/Italy (-8 bps/-7 bps) outperforming. Greek bonds profited from Friday's unexpected cabinet reshuffle by PM Tsipras, who replaced critics of the latest bailout reforms. Tsipras hopes that the second bailout review will be completed this year, paving the way for debt relief talks. The euro group smashed these expectations though (see headlines). Portuguese bonds profited from the parliamentary approval of the 2017 budget.
Uneventful eco calendar
The US eco calendar contains October NIFB small business confidence and the September JOLTs job openings, but more important are the US presidential elections. Results are expected by early Wednesday. Small business confidence eased slightly in September, but actually already peaked in December 2014. It is no market mover though and neither are the JOLTS data. Chicago Fed Evans speaks on the economy and policy. Evans is one of the most dovish (non-voting) governors, but we think he supports a December decision to increase rate. EMU national production data will be published at the opening of the session (see headlines).
The Netherlands and US tap bond market
The Dutch debt agency kicks off this week's scheduled EMU bond supply with a 10-yr DSL auction (€2.5B 0.5% Jul2026). The bond traded stable in ASW spread terms going into the auction, but is one of the cheapest on the Dutch curve. Therefore, we expect decent demand. The US Treasury starts its mid-month refinancing operation with $24B 3-yr Note auction. Currently, the WI trades around 0.98%. Given the timing of the auction, just ahead of the US elections, and the prospect of a 25 bps rate hike by the Fed in December, we fear tepid demand.
US election day!
Overnight, Asian stock markets record profits of around 0.50% in line with additional gains in WS yesterday evening following the latest developments in Clinton's email probe. The US Note future and Brent crude trade stable, suggesting a neutral opening for the Bund. Weak Chinese trade data didn't influence markets.
Today's calendar contains US NFIB Small business optimism and a speech by Chicago Fed governor Evans, but will be completely dwarfed by the US presidential election. In the run-up to tonight's vote, we expect most investors to stay side-lined causing low volume range-bound trading.
Regarding the outcome, we expect core bonds to undo November gains in case of a Clinton-victory. In case of a Trump victory, we expect global markets to react in a way similar to the surprising Brexit-vote at the end of June: a big initial risk-off reaction, which in bond terms, could be used to sell the uptick.
Medium term technical pictures deteriorated. Better eco data, rising inflation expectations and central banks' change of tone (extraordinary policy won't last forever) triggered the sell-off which started at the beginning of October. The US 10-yr and 30-yr yields held above key resistance levels at 1.75% and 2.5%. The German 10-yr yield moved above the 0.10% resistance. This break is relevant from a technical point of view and unlocks a new trading range (0.10%-0.30%).
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