Bund ends consolidation phase with new down leg

KBC Market Research Desk KBC Bank

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Global core bonds lost ground yesterday with Bunds underperforming US Treasuries. There was no clear trigger that started the sell-off. The continued rise of oil/commodity prices caused a bottoming out process in market-based inflation expectations (eg 5y5y forward, see graph) and could get more attention. The Bund's downleg magnified after the technical break below short term support at 158.89. German yields eventually increased by 1.3 bps (2-yr) to 6.9 bps (10-yr). The US yield curve steepened with daily yield changes ranging between -0.1 bp (2-yr) and +3.8 bps (30-yr). Portugal (-2 bps) and Greece (-3 bps) slightly outperformed on peripheral markets.

Most Asian equity indices trade lower in line with WS yesterday. China underperforms. The US Note future stabilizes. Cleveland Fed Mester, voting FOMC member, called in favour of more gradual rate hikes this year and next. She added that the Fed could speed up tightening if US inflation moves above target and slow down if downside risks stemming from a trade war materialize. We expect a neutral opening for the Bund.

Today's eco calendar contains EMU consumer confidence and a speech by Chicago Fed Evans. They'll probably won't impact trading. Consumer confidence is expected to show a small drop from 0.1 to -0.1. A bigger setback is likely in line with other confidence indicators even if the gauge remains at high levels from an absolute point of view. Chicago Fed Evans doesn't vote on policy this year and tends to be somewhat more dovish. Yesterday's sell off probably has further to go, especially in the Bund and especially if inflation expectations move higher. The US Note future risks running into support sooner with the US 10-yr yield approaching the 2.95% 2018 high.

The German 10-yr yield bounced off key support levels (0.46%/0.48%), consolidating since the end of March. Yesterday's move suggests the start of a new upleg. The US 10-yr yield lost its upward momentum mid-March, hovering sideways between roughly 2.7% and 2.95%. We're heading for a test of the upper bound, but don't see reasons for a break yet.

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KBC Market Research Desk

KBC Bank

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