Core bond lose ground; 10-yr Bund yield regains 0.2%


Global core bonds worked off overbought conditions yesterday and were hit by stronger US equities. German Bunds underperformed US Treasuries as investors scaled back safe haven bets ahead of the 1st French presidential election round, causing a technical re-break of the German 10-yr yield (0.20%). French assets were the star performers with both bonds (OAT’s) and stocks (CAC40) outperforming. Yesterday’s ECB survey about the malfunctioning of several money markets (as QE creates scarcity of high quality collateral) might still have been in play as well. US eco data (weekly jobless claims, Philly Fed business outlook) were marginally weaker than expected, but ignored. While Bunds hovered sideways after the first major move lower, US Treasuries suffered during the US session from stronger equities. US Treasury secretary Mnuchin said that the Trump administration is ‘pretty close” to announce major tax reforms. His comments kept Treasuries near the lows of the day, but didn’t trigger a stronger negative reaction.

In a daily perspective , the German yield curve bear steepened bearish with yields 1.2 bps (2-yr) to 4.1 bps (10/30-yr) higher. Changes on the US yield curve ranged between +0.8 bps (2-yr) and +2.5 bps (5-yr), the belly underperforming the wings. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 7/8 bps with Portugal &France outperforming (French elections). Core spreads widened slightly.


Attention for EMU (and US) PMI business sentiment

Today’s focus is on the business sentiment in the US and the EMU for April. In March, EMU composite business sentiment climbed to 56.4 from 56 previously.
Today’s focus is on the business sentiment in the US and the EMU for April.Both manufacturing (56.) and services (56) contributed to the improvement. The omens are good for yet another (slight) increase of the headline index in April, which would bring the index to a 6-yr high. The ZEW and Sentix indices, albeit investors’ and no business sentiment indicators, went up in April. New orders and future output indices improved in the March reports, which are often pointers for the next month’s outcome. The consensus expect a stabilization, but we see risks on the upside. The US Markit PMI is less of a market mover as ISM business confidence. US PMI is expected to have risen slightly in April for both manufacturing and services following a 3 months decline Regional surveys (Philly Fed and NY) fell sharply in April. This suggest that risks are on the downside of consen.


Side-lined ahead of French elections?

Overnight, most Asian stock markets gain ground, lifted by WS’s bullish sentiment, with China underperforming (flat). Trump’s intention to launch import tariffs on steel leaves no traces on Chinese steel manufacturers though. The US Note future and Brent crude stabilize, suggesting a neutral opening for the Bund.

Today’s eco calendar heats up with EMU and US PMI’s. We expect a mixed signal with stronger European data and weaker US ones. In that case, German Bunds could prolong this week’s underperformance vs US Treasuries. However, we expect many investors to remain side-lined ahead of the 1st round of French presidential elections. The outcome will determine the start of next week’s dealings. If the tail risk manifests (Le Pen-Mélenchon or Fillon-Mélenchon), markets will start discounting a “Frexit” risk (ie risk aversion with stronger Bund, weaker OAT’s, weaker euro). Any other outcome could send a relief rally through markets with Bunds selling off further and the German 10-yr yield trading back higher in the 0.2%-0.5% range.

Technically: Last week’s risk aversion pushed the US 5- and 10-yr yield below key support levels (respectively 1.8% and 2.3%), but a sustained break below 0.2% support in the German 10-yr yield didn’t occur. The Bund and US Note future are no longer overbought. We expect consolidation today around current levels. Our medium term strategy remains that US yields will recapture lost support levels and afterwards turn higher in the old trading bands as the Fed prepares another rate hike in June and will start to run-off its balance sheet before the end of the year.


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