Core bonds gain ground ahead of the weekend

Rates

On Friday, global core bonds rebounded modestly after Thursday's post FOMC profit taking and ahead of the weekend. The move of the US Treasuries was partly technically, as the 5s and 10s re-tested the 2% and 2.5% yield supports (post FOMC lows), but no break occurred. There was a small temporary dip on mixed US production data and a slight acceleration higher after the Michigan consumer sentiment report. The latter showed buoyant consumer sentiment, but the market concentrated on the lower inflation sub-indices. In a daily perspective, the US yield curve bull flattened with yields down 1.7 bp (2-yr) to 4.1 bps (30-yr). The German yield curve flattened as yield changes ranged between +1.8 bps (2-yr) and -3.1 bps (30-yr). On intra EMU bond markets, 10-yr yield spreads versus Germany are nearly unchanged with France (+3 bps and Greece (+5 bps) slightly underperforming.

The short end of the German yield curve underperformed Friday on Thursday's eve comments of ECB Nowotny who said "the ECB could hike (deposit) rates before the end of QE". Minneapolis Fed Kashkari explained why he dissented at last week's Fed meeting. He wants policymakers to release a detailed balance sheet reduction plan before the next rate hike. He fears that markets will react in a hawkish way on such plan, which could trigger tighter conditions and be a substitute for a rate hike. The central bank is still missing its 2% inflation target and may not have reached full employment, suggesting a somewhat accommodative policy would still be appropriate, he added.

Thin calendar to start the trading week

The eco calendar is completely empty. Regarding events, the Belgian debt agency auctions two OLO lines (see below) and the Eurogroup meets on Greece, pension systems, the budgetary plans and the implementation of the Stability and Growth path. On Friday, Greece FM Tsakalotos held a teleconference with its creditors to narrow differences ahead of the Eurogroup meeting. He expects to reach a holistic deal by April 7 Eurogroup meeting. It could open the road for inclusion in the ECB's QE programme. The problem is complicated though by signals the US is critical about IMF participation. ECB Weidmann speaks, as does Chicago Fed Evans. Evans comments are interesting as, besides Yellen, he is the second Fed president to speak since the FOMC meeting. Evans (voter) has an dovish profile and we put him by the three members whose rate projection for 2017 are below the median 1.375% projection. More specific, we think he put 2 rate hikes for 2017, while governors Kaskhari and Bullard are still a bit more dovish with one hike each (which has materialized).

Neutral Belgian OLO auction?

The Belgian debt agency taps on the run 10-yr OLO 80 (2.6% Jun2027), on the run 20-yr OLO 76 (1.9% Jun2038) and off the run OLO 60 (4.25% Mar2041) for a combined €2.7-3.2B. Year-to-date, the debt agency already completed more than 1/3rd of its stated OLO funding plan (€35B) thanks to three new syndicated benchmark deals. The bonds on offer cheapened slightly in ASW spread terms going into the auction. The Jun2027 OLO is rather cheap on the Belgian curve, while the other two bonds trade normal. From a relative point of view, Belgian debt is the most expensive from the "semi-core" (France, Ireland, Slovakia) and considered a close proxy for France. With French elections approaching, we expect neutral demand. Slovakia sells 1.375% 2027 and 0% 2023 bonds today.

Consolidation in absence of key eco releases or events?

Overnight, Asian equities (excl. Japan) open the week weaker to mixed but without any firm intra-day direction. US Treasuries are slightly higher in thin conditions, while the dollar is somewhat weaker. The G-20 meeting is the risk-off driver, as several FM left the meeting frustrated over Trump's rejection of the long-held trade doctrine. The statement dropped a pledge to avoid all forms of protectionism.

Today's, calendar contains no economic reports of importance. ECB Weidmann and Chicago Fed Evans speak. Their comments are interesting, but unlikely to be market moving. The calendar sets the stage for a thinly-traded, sentiment driven bond session. The negative sentiment coming from the G-20 may favour core bonds, but we are sceptical it will be a lasting dominant theme in the bond markets today. Later this week, the calendar remains is thin, but central bank speakers are plentiful. Technically, US yields failed to break key resistance levels in the run-up to the Fed-meeting and suffered a setback afterwards. We expect the US 10-yr yield to trade in the 2.3%-2.64% range, perhaps even until after the French presidential elections. In the near-term, the US Note future probably has more upward potential. Our scenario remains for 4 rate hikes in 2017.

Last's ECB meeting and Bund sell-off comforted our call that another "calibration" of the ECB's QE programme will happen in H2 2017. Therefore, we have a long term bearish view on Bunds as well. Technically, the German 10-yr yield moved at a rapid pace from the 0.2% lower bound of the sideways range towards the 0.5% upper bound, but a break didn't occur. Like in the US, we expect range trading ahead of the French elections.

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