US Treasuries gain modestly on again weaker eco data
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US Treasuries gain modestly on again weaker eco data
German Bunds continued to underperform US Treasuries on Friday morning as follow through selling in thin market conditions prevailed. However, the downward move was exhausted by mid-morning and Bunds gradually recovered. US Treasuries held a tight range, but that changed after housing starts and permits disappointed. The simultaneous fall of the dollar and equity futures reinforced core bonds’ up leg. The flattening of the US curve of previous days was partially unwound. The US mid-morning US Michigan consumer sentiment survey disappointed as well, keeping the bid alive. It also allowed German Bunds to penetrate positive territory. US Treasuries topped out though and lost some of the gains. Speeches of Fed Kaplan and Kashkari (FOMC voters) were interesting (see headlines) but didn’t affect markets.
In a daily perspective, the US curve bull steepened with yield 3.2 bps (2-yr) to 1.2 bps (10 & 30-yr) lower. German yields ended 0.6 bps to 1.6 bps lower. The 30-yr underperformed (+ 1.3 bps). Intra-EMU spreads versus Germany (10-yr) widened 3-to-6 bps, a first correction on the spread narrowing of previous 7 sessions. The Greek spread narrowed about 20 bps on the bailout agreement which allows Greece to redeem maturing bonds in July.
Unattractive calendar today and thin further out
The EMU eco calendar is empty today and only becomes interesting on Friday with the June Markit business PMI’s. There are few ECB speakers (only Portuguese governor Costa on Tuesday), while the ECB bulletin is published on Thursday. The US eco calendar is also empty today and contains mainly second tier releases further out this week. The only potential market mover is an appearance of NY Fed Dudley at a roundtable. Later this week, 8 other Fed governors give their views. This allows us to get a better take on the past FOMC meeting and the outlook for policy going forward.
Low EMU bond supply this week
The Belgian debt agency starts this week’s scheduled EMU bond supply today by tapping three on the run OLO’s for a combined €2.7-3.2B: OLO 82 (0.5% Oct2024), OLO 81 (0.8% Jun2027) and OLO 78 (1.6% Jun2047). Year-to-date, Belgium raised already €21.63B via 4 syndicated benchmarks and 2% regular auctions, which is 62% of the €35B OLO funding need. Bond on offer traded rather stable in ASW spread terms going into the auction. OLO 81 (Jun2027) sits cheap on the OLO curve, while the other bonds on offer are neutral. We expect a plain vanilla auction. The German Finanzagentur holds a 30-yr Bund auction on Wednesday (€1B 2.5% Jul2044).
Slow start to trading week, with wildcard Dudley
Overnight, Asian stock markets eke out gains between +0.5% and +1%. The US note future and oil prices trade stable though, suggesting a neutral opening for the Bund. French president Macron’s LREM won a solid majority in French parliamentary election, but that was markets base scenario, so we don’t expect a reaction (perhaps even some buy-the-rumour, sell-the-fact in OAT’s?!).
Today’s eco calendar is empty suggesting low volume neutral trading in tight ranges. Fed governor Dudley speaks to business and community leaders, but remains a wildcard shortly after the Fed’s June policy meeting. Dudley is a bellwether and close ally to Fed chairwoman Yellen. Softness/cautiousness on his end could strengthen markets’ dovish view. US yields (10y, 30y) remain close to key support levels even as the Fed held on to the blueprint of its future tightening cycle last week. If support levels in US yield terms hold into the weekend, we recommend a cautious sell-on-upticks strategy. Our basis assumption remains that the long term rally of core bonds is over as policy normalisation slowly starts (ECB) or accelerates (Fed).
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