Bond markets in wait and see modus: Vote today!!

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Bond markets in wait and see modus: Vote today!!

Global core bonds hovered sideways in a tight range yesterday and closed modestly lower. The small intra-day movements of the Bund were inversely correlated with equities (EuroStoxx), which traded also in a tight range. Similarly, US Treasuries tested both the upside and the downside once, but finally stuck close to opening levels. Traders awaited the procedural vote on the repeal of Obamacare, which was delayed and will finally take place today (see below). EMU data had only a temporarily impact. The ECB’s TLTRO was a big success. US initial claims (weak) and New Home sales (strong) had some temporary impact. In a daily perspective, German yields rose by 3.2 bps (2-yr & 30-yr) to 2.6 bps (30-yr). Changes on the US yield curve vary between +0.4 bps (2-yr) and -+1.5 bps (5yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed 3 to 4 bps for both peripherals and semi-core bonds, helped by a strong TLTRO bidding.

EMU business confidence and US durables in focus

The eco calendar contains two interesting reports. In EMU, PMI business confidence is expected to have slightly eased to 55.8 in March from 56 in February, with both the manufacturing and service sectors contributing to the minor decline. After the French and Belgian national business sentiment data showed slightly more easing, we put risks for EMU PMI’s on the downside of expectations. However, the level should stay high and the quarterly average will show an improvement versus Q4 2016, which suggests a likely acceleration of growth in Q1 2017. The US durable orders are expected to have risen 1.3% M/M in February, following a 2% M/M rise in January. Excluding the volatile transportation orders, a rise by 0.6% m/m is expected following a flat figure for January. We support the consensus view and have no arguments to deviate. The report is very volatile in nature and thus surprises are possible.

Fed speakers on duty are Evans (opening remarks at Community event), Bullard (on economy), Dudley and Williams. We don’t expect these speakers to affect markets due to the subject of the speech (Evans/Dudley/Williams) or due to the outspoken (dovish) profile (Bullard). The vote on the repeal of the Obamacare in the House will overshadow Fed talk and US eco data.

Vote on healthcare bill crucial for sentiment

Overnight, Asian risk sentiment improved as comments of the chairman of the House Freedom Caucus, Meadows, suggest that the House Republicans will after all agree to the new bill to replace Obamacare. The dollar, US yields and Asian stocks trade higher. We expect a slightly softer opening for the Bund.

Today’s calendar contains EMU PMI data (downside risks) and US durable goods orders. Several Fed speakers (see above) hold public appearances. We expect both eco data and Fed governors to be overshadowed by the vote on the new healthcare bill (expected in the US morning session). That could keep investors in wait-and-see mode. Failure to push the bill through could signal problems ahead for his economic agenda and might falter markets’ faith in the reflation trade. In that case, we expect more of Tuesday’s risk off scenes with higher US Treasuries and a test of 2.3% support in the US 10-yr yield. The market reaction in case of a “no-vote” will probably be bigger than the relief rally (lower US Treasuries) in case of a “yes-vote”.

Technically, we expect the US 10-yr yield to trade in the 2.3%-2.64% range. Longer term, we maintain our scenario of 4 rate hikes in 2017 and higher long term yields. The German 10-yr yield moved at a rapid pace from the 0.2% lower bound of the sideways range towards the 0.5% upper bound, but a break didn’t occur. Like in the US, we expect range trading ahead of the French elections. Comments on the central bank’s exit strategy could still influence the front end of the European yield curve. The March ECB meeting and recent talk by ECB comforted our call that another “calibration” of the ECB’s QE programme will happen in H2 2017.

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