Traditional risk correlation falters
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Global core bonds eked out some modest, technically insignificant gains yesterday. Strength in the Bund and the US Note future was somewhat strange given positive risk sentiment (European/US stocks up to 1.5% higher), mixed eco data (weak in Germany, strong in US) and Fed comments pointing to more near term rate hikes. The latter was visible in the bear flattening of the US curve though. US yield changes ranged between +1.7 bps (2-yr) and -0.4 bps (30-yr). The German yield curve bull flattened with yields 0.3 bps (2-yr) to 2.2 bps (30-yr) lower. 10-yr yield spread changes vs Germany ended narrowly mixed with Italy outperforming (-3 bps).
Risk sentiment remains positive overnight. Asian bourses gain ground (apart from China), USD/JPY trends higher and the US Note future suffers some losses. We expect a lower opening for the Bund.
Today's eco calendar is thin with only final EMU CPI data. Fed speakers Dudley and Quarles are only scheduled towards the end and after US dealings. The former is yesterday's man who will be replaced by SF Fed Williams in June. The latter probably won't touch on monetary policy. The Fed's Beige Book is expected to continue to paint a positive picture about the US economy. Overall, there are no strong trading themes. Comments in the sidelines of the Trump-Abe Summit and Q1 earnings could influence risk sentiment. However, the traditional risk correlation (higher stocks, higher rates) was rather loose of late. We expect the consolidation process in core bonds to continue in this setting.
The German 10-yr yield reached key support levels (0.46%/0.48%). We think that the slide went far enough against the background of the ECB slowly turning the corner and embracing policy normalization. We turn neutral going forward. The US 10-yr yield lost its upward momentum mid-March. Rising geopolitical risks weighed on risk sentiment and pulled long term yields down as well. We favour sideways action, roughly between 2.7% and 2.9%.
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