Bund underperforms listless US Treasuries

Yesterday, US Treasuries traded listless in the absence of new drivers. Nevertheless, German Bunds underperformed US Treasuries. Two possible but not completely coherent stories might explain the price action. Fears about a tapering or less dovish ECB talk at tomorrow's meeting haunted Bunds. However, renewed interest for peripherals, also in the equity markets, may have in the disadvantage of Bunds as well (European risk-on). Whatever, the Bund future is now near the sell-off lows, the level of two and three days ago. The eco calendar was empty apart from very strong German factory orders and the final revision of Q3 EMU GDP growth (confirmed at 0.3%) which didn't impact trading. In a daily perspective, the German yield curve shifted 1.6 bps (2- yr) to 4 bps (10-yr) higher. Changes on the US yield curve varied between -0.6 bps (2-yr) and +1.4 bps (30-yr), with yields up only at the very long end. On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed up to 4 bps in (semi-)core countries with Italy (-8 bps), Portugal (-11 bps) and Spain (-10 bps) outperforming. As the Italian referendum didn't cause market turmoil, investors used the recent spread widening to buy again into peripheral bonds. The uncertain fate of BMPS seems no issue.

Nearly empty calendar

The Euro area calendar contains only Italian unemployment and Spanish house prices, no market movers. Some more attention may go to the UK industrial production data, but these are only for UK markets of some importance. In the US, only the JOLTS job openings report and consumer credit are released, but these are also no market movers. The Canadian central bank meets, but analysts don't expect a rate change.

Small German Schatz auction

The German Finanzagentur holds its final Schatz auction of the year by tapping the 0% Dec2018 bond for a relatively small €3B. Total bids averaged €5.66B at the previous 4 Schatz auction, suggesting that the auction will pass smoothly even if the upcoming ECB meeting might keep some investors sidelined. The bond cheapened slightly in ASW spread terms going into the auction.

Counting down to ECB meeting

Overnight, most Asian equity markets trade positive, eking out gains of up to 0.5% with Japan slightly outperforming. Brent crude and the US Note future trade stable, suggesting a neutral opening for the Bund.

Today's eco calendar remains uninspiring for core bond trading which means that investors will continue counting down to tomorrow's ECB meeting. We expect sideways trading. Latest press articles suggested that the central bank will be less soft than generally expected. The Bund is close to 160.72 support (March contract!), but we don't expect a break ahead of the ECB. Oil prices and inflation expectations remain wildcards for intraday trading.

Technically, the US 2-yr yield broke above 1.1% resistance. The US 5-yr yield tries to break above the 1.85% area, while a first test of 2.5% resistance in the US 10-yr yield failed. The US 30-yr yield remains below a similar 3.25% mark. We wait for specific news (e.g. a hawkish Fed next week) before anticipating a break higher (5yr & 10 yr). We hold our sell-on-upticks approach in US Treasuries.

Download The Full Sunrise Market Commentary