Core bonds continue their slide despite risk-off

Core bonds were dealt a striking blow at the start of the week yesterday. Better than expected Chinese November PMI’s kickstarted an upbeat Asian trading session. A further rise in final European PMI’s added to the positive sentiment. But last and foremost, the (to be confirmed) new SPD leadership chosen over the weekend (Walter-Borjans and Esken) revived market expectations of German fiscal stimulus along the road. US president Trump reinstalling tariffs on steel from Brazil and Argentina and Wilbur Ross saying China faces a similar fate (of increased tariffs) in case of no deal impacted stock markets rather than bonds. The German Bund underperformed US Treasuries where an unexpected fall in the manufacturing ISM (from 48.3 to 48.1 vs. 49.2 consensus) hampered the decline. The German yield curve bear steepened with yields rising 1.4 bps (2-yr) to 9.2 bps (30-yr). The yield spread vs. Germany widened in Italy (+4 bps) and were close to unchanged in other countries. US yields declined 1.1 bp at the short end (2-yr) while advancing up to 6 bps at longer tenors (30-yr).

Overnight sentiment is gloomy. The US proposed tariffs on about $2.4 bn in French products as retaliation for a tax on revenues of digital giants. USTR Lighthizer also said it’s exploring similar probes on turkey, Austria and Italy. Chinese state media announced the government will release a list of “unreliable entities” soon which could lead to sanctions against US companies and complicate trade talks. The publication has been sped up in response to a US bill suggesting sanctions against Chinese officials over alleged abuse of Uighur Muslims in the Xinjian region. Most Asian stocks are colored in red although most indices have rebounded from intraday lows. Despite risk-off, both the German Bund and US Treasuries surprisingly continue yesterday’s decline. Australian yields jump after its central bank said some global risks are receding. Japanese yields also grind higher (up to 3 bps) on the worst 10-year auction since 2016.

Today’s eco calendar is basically empty, leaving global risk sentiment in the driver’s seat. We cannot but to take notice from the ongoing slide in core bonds in the current risk-off climate. It suggests the recent retracement in yields for now has gone far enough. We expect core bond yields to hold an upward bias as markets await key data later this week.

Technically, the German 10-yr yield broke above -0.41% resistance as geopolitical uncertainty diminished and capped intermediate resistance at -0.328%, improving the technical picture. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the upper half of the 1.43%-1.94% sideways trading channel. First tests to take out 1.94% failed, causing temporary corrective return action lower.

Download The Full Sunrise Market Commentary