Global core bonds suffered some losses yesterday with US Treasuries underperforming German Bunds. Bunds took an early lead after Reuters reported that a "significant minority" of ECB governors didn't believe in an H2 growth recovery. The upleg was undone by another ECB story based on "people close to the matter", this time run by Bloomberg. The second article suggested little willingness for tiering negative rates. A tiered system is synonymous to a pledge of keeping rates lower for longer. Core bonds started drifting lower during US trading despite disappointing March US production data. The NAHB housing index recovered slightly further, as expected. Stock markets and oil prices remained supported. US yields added 2.1 bps (2-yr) to 3.6 bps (10-yr) on a daily basis. The German yield curve steepened with yield changed between -0.8 bps (2-yr) and +1.2 bps (30-yr). 10-yr yield spread changes vs Germany ended narrowly mixed.
Core bonds edge further down this morning after Chinese eco data silences the most pessimistic growth scenarios. Q1 GDP grew by 1.4% SA Q/Q and 6.4% Y/Y (vs 6.3% forecast). More importantly, industrial production showed a significant rebound in March (8.5% Y/Y vs 5.9% Y/Y) with also retail sales (8.7% Y/Y) beating consensus. Asian stock markets profit only marginally from the news while Brent crude rises above the technical $72/barrel hurdle.
The onus of today's eco calendar is behind us. We think that core bonds might lose some more ground on hopes that the through of the Chinese economic downturn is now behind us. Final EMU CPI data won't impact trading. Speeches by Fed Harker and Bullard are wildcards. The Fed releases its Beige Book which assesses regional economic momentum in greater detail. We expect it to underpin the Fed's cautious attitude and thus conflict with this morning's "enthusiasm". Q1 earnings continue with amongst others Morgan Stanley and Alcoa.
Long term view: markets concluded that the ECB missed out on this cycle. They even start pondering the possibility of an additional deposit rate cut. The downtrend in the German 10-yr remains in place so far. Regarding Fed policy, markets now discount a 40% probability of a Fed rate cut by December. The US 10-yr yield closed above the lower bound of the previous 2.5%-2.79% trading range. A confirmation would turn the technical picture more neutral again.
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