KBC Market Research Desk
KBC Bank
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Yesterday, markets waited in vain for some theme to trade on, but didn’t find it. So, sentiment driven, directionless, thin trading was name of the game with maybe positioning for supply slightly affecting the curve. In a daily perspective, US yields ended 0.4 bps (2-yr) to 1.1 bp (10-yr) higher, slightly bear steepening the curve. German yields rose by 0.3 bps (30-yr) to 1.6 bps (5-yr), changing the curve erratically. On intra-EMU bond markets, 10-yr yield spreads versus Germany ended nearly unchanged with Portugal underperforming (+7 bps) ahead of a new 10-yr syndicated benchmark deal. Regarding economic releases, French production for November was unusually strong, but the surprise of the day was the surging US small business sentiment, still a Trump effect. Neither are market movers and consequently didn’t affect trading. The auctions went well, with a strong US 3-yr auction the eye-catcher, but couldn’t stir much fuss. Oil and equities traded sideways till mid US session when oil fell sharply (see headlines), but it had surprisingly little lasting effect on US Treasuries and equities, which basically stayed sideways oriented to close the session little changed.
Trump at last holds press conference instead of a tweet
The EMU and US eco calendars are empty besides the Spanish production data for November. Attention goes to the press conference of president-elect Donald Trump, but we are not aware of the exact timing. Markets have high expectations about the changes in taxation, investment infrastructure and (de)regulation, but other issues like immigration and protectionism may be tackled too. Markets anticipated a much easier fiscal policy via lower taxation and higher infrastructure spending. Will Trump be able to satisfy high expectations?
Germany, Portugal and US tap market
The German Finanzagentur issues a new 10-yr Bund (€5B 0.25% Feb2027). Grey market trading suggests that the bond will be priced with a 5.2 bps pick-up in ASW spread terms compared to the previous 10-yr benchmark (0% Aug2026). That corresponds with a 9 bps pick in yield terms. Total bids at the previous 4 Bund auctions averaged €4.35B, suggesting that it will be hard to get the auction covered although we add that demand is generally somewhat stronger at the start of the year. The Portuguese debt agency announced the planned syndicated sale of a new 10-yr benchmark (Apr2027). The transaction will likely be done today. Portugal intends to issue between €14 and €16B treasury bonds this year.
The US Treasury started its mid-month refinancing operation with a very good $24B 3-yr Note auction which stopped through the 1:00 PM bid side with a strong bid cover (2.97). Bidding details were a little mixed (strong indirect bid, disappointing direct), but decent overall. Today, the US Treasury holds a $20B 10-yr Note auction. Currently, the WI trades around 2.39%.
Will Trump hold on to his fiscal stimulus plans?
Overnight, Asian stock markets trade positive with China underperforming. The US Note future and Brent crude stabilize, suggesting a neutral opening for the Bund.
Today’s eco calendar remains uneventful, but president-elect Trump’s first press conference since his election victory will get much attention. Markets will especially pay attention to details about his fiscal plans. If he sticks to the expansionary fiscal line, it could bring the reflation-trade back alive (negative US Treasuries). Backtracking on some of his initial plans will bring 125-09 resistance back in sight. Heavy supply in EMU and US is a minor negative for core bonds this week. Oil prices and general risk sentiment could influence sentiment ahead of Trump’s speech.
Medium term, we expect US markets to further align with the Fed’s scenario of 3 rate hikes this year. We hold our negative bias for US Treasuries with entry levels around 125-09 (tested after payrolls). In EMU, the German Bund bounced into 164.9 resistance at the start of the year and fell prey to profit taking on higher German inflation data. As the underlying economic picture in EMU improves further, we also expect more downside in the Bund despite the ECB’s bond buying programme.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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