US supply and fragile risk improvement weigh on bonds
|US payrolls declined by 701k in March and only show the tip of the iceberg after weekly jobless claims exploded to 6.6 million. US Treasury gains were modest at best, suggesting that quite some bad news is discounted at current levels. US yields fell by 0.7 bps (10-yr) to 2.3 bps (30-yr) with the belly of the curve underperforming the wings. Changes on the German yield curve remained small with the very long end (30-yr) outperforming (-3 bps). 10-yr yield spread changes vs Germany widened by up to 5 bps with Italy (+9 bps) and Greece (+18 bps) underperforming. Oil prices shot up from $28/b to $34/b currently as OPEC+ would discuss production cuts today through a videoconference.
Asian stock market gain around 3% this morning with China and India closed. US equity futures record gains as well after US President Trump and Vice-President Pence said that there are early signs that the US outbreak is stabilizing (decline in NY deaths). While such news flow might (positively) impact short term market momentum in absence of headline stories, we'd be very cautious to read too much into them. Something to follow-up on with a potentially much bigger impact is an FT story on several EMU governments starting with preparations to ease lockdown restrictions. Core bonds face some selling pressure, adding to our working hypothesis that we are seeing a return of the traditional negative correlation between stocks and (core) bonds.
Today's eco calendar is extremely thin. The US Treasury starts its mid-month refinancing operation with a $40bn 3-yr Note sale ($2bn larger than previous). 10-yr and 30-yr Bond sales follow tomorrow and on Wednesday. In absence of other drivers, this could trigger some underperformance of US Treasuries vs German Bunds and adds to the possible downward intraday bias. Traded volumes are traditionally rather light in the run-up to the long Eastern weekend with most European and US markets closed on (Good) Friday. European markets will follow up on developments on EU-backed fiscal aid to countries in need. European Ministers of Finance (Eurogroup) meet tomorrow to discuss options. The most likely scenario is the use of the standing ESM facility to grant credit lines with the aim of tackling the current health crisis. Resistance against joint EU-backed debt ("coronabonds") remains too large. The fortunes for riskier assets seem positive this morning, but risk sentiment remains very fragile. Looking beyond today/the next days, we continue to err on the side of caution as we haven't turned a corner in the coronacrisis yet. Elevated stress on a corporate level could be the next domino. From a technical point of view, the German 10-yr yield lost intermediate support at -0.43% last Friday, implying a return to the lower half of the trading band. For US yields, the Fed's unlimited QE announcement is the de facto start of curve control probably reducing volatility.
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