Bunds outperform on anxious ECB rumours

Rates

Global core bonds traded with an upward bias yesterday with Bunds outperforming US Treasuries after Reuters quoted sources indicating that the ECB is anxious of changing its message again after the “overinterpretation” of the March policy message. People familiar with the matter added that the onus should be on the current easy policy stance, which is far from ending, rather than on future policy normalisation. At the end of the day, German yields decline by 2.4 bps (30-yr) to 6 bps (5-yr). Changes on the US yield curve ranged between -2.8 bps (30-yr) and -4.3 bps (30-yr), bull flattening the curve. On intra-EMU bond markets, 10-yr yield spread changes versus Germany closed nearly unchanged with Greece outperforming (-12 bps) on supportive talk pointing in the direction of a bailout review agreement at the April 7 Eurogroup meeting.

Better-than-expected US pending home sales, a solid 7-yr Note auction (see below), higher oil prices (see headlines) and hawkish Fed speak (Williams & Rosengren) didn’t cause damage to US Treasuries. We retain some interesting comments from Boston Fed Rosengren, a dove who turned hawk last year. He advocates three more rate hikes this year and suggests that it’s time to change the Fed’s framework. From June on, he wants the Fed to hike rates every other meeting unless economic data are materially inconsistent with the forecast. At present, the outcome of each FOMC meeting depends on nuances of incoming data,

German/EMU inflation already topping off?

Today’s eco calendar contains EMU confidence data (EC), US weekly jobless claims, the final reading of US Q4 GDP and German inflation data. We think that markets will especially pay attention to the latter. After rising above the ECB’s 2% inflation target in February (2.2% Y/Y), consensus expects German inflation (and EMU CPI tomorrow) already to top off with a setback to 1.9% Y/Y. Plenty ECB- and Fed-members are scheduled to speak, but the topic of their speeches if often non-monetary policy related. If any, we eye NY Fed Dudley who is scheduled after US close. Dudley is a heavyweight inside the FOMC and close ally to Fed chairwoman Yellen.

Italy concludes this week’s supply

The US Treasury concluded its end-of-month refinancing operation with a solid $13B 2-yr FRN auction and a good $28B 7-yr Note auction. The latter stopped through the 1:00 PM bid side with the best bid cover since November (2.56). Bidding details pointed to a strong indirect bid while direct and dealer bids were more in line with average.

The Italian debt agency concludes this week’s scheduled EMU bond supply by tapping on the run 5-yr BTP (€1.75-2.25B 1.2% Apr2022), 10-yr BTP (€2-2.5B 2.2% Jun2027), 50-yr BTP (€0.5-0.75B 2.8% Mar2067), off the run BTP (€0.5-1B 0.65% Nov2020) and a floating rate 7-yr CCTeu (€2-2.5B Feb2024). The bonds on offer didn’t cheapen in ASW spread terms going into the auction and the on the run BTP’s are slightly expensive on the Italian curve. Given the relatively low amount of BTP’s on offer, we nevertheless expect a plain vanilla auction.

Upward intraday bias core bonds

Overnight, most Asian stock markets cede ground with China underperforming (-1%). Brent crude (test $52.5/barrel resistance) and the US Note future (small downward bias) paint a different picture. We expect a neutral opening for the Bund.

Today’s calendar heats up and we especially eye German CPI. A decline back below the 2%-mark, which consensus expects, could ease pressure/speculation of an early ECB exit. Together with end-of-quarter buying and the end of the US refinancing operation, it could support core bonds in an intraday perspective.

Technically, we expect the US 10-yr yield to trade in the 2.3%-2.64% range. Moves towards the lower bound could be used to offload bonds or position for higher rates. Longer term, we maintain our scenario of 4 rate hikes in 2017 and higher long term yields. The German 10-yr yield trades in the 0.2%/0.5% range and we hold a similar approach as in the US ahead of the French elections The March ECB meeting comforted our call that another “calibration” of the ECB’s QE programme will happen in H2 2017.

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