Core bonds grind lower into US close

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Core bonds grind lower into US close

Global core bond trading remained confined to tight ranges. An attempt to rise on weak stock markets (-1%) during European dealings rapidly ran out of steam. As the US trading session got going, core bonds even faced new selling pressure as stock markets rebounded in the US session. Yesterday’s eco calendar was empty and might have kept investors sidelined ahead of central bank speakers and key US eco data. At the end of the day, the German yield curve shifted 0.1 bp (30-yr) to 0.7 bps (10-yr) higher. The US yield curve flattened with yield changes ranging between +2.7 bps (2-yr) and -0.9 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 2 bps with Spain (-5 bps), Portugal (-7 bps) and Greece (-12 bps) outperforming. Catalan president Puigdemont suggested he is open to alternatives to Catalan independence.

Busy agenda today

The eco calendar heats up today with US PPI, US NFIB small business optimism, German ZEW investor sentiment, EMU Q3 GDP and EMU industrial production, but we don’t expect them to really move markets. US eco data risk being overshadowed by tomorrow’s CPI and retail sales. German ZEW is expected to stabilize near multiyear highs for the headline number, supported by the stock market rally (which lasted until last week). EMU Q3 GDP is forecast to remain strong at 0.6% Q/Q while industrial production are outdated.

Several central bankers speak at a press conference in Frankfurt today (20th Euro Finance week). ECB Draghi, Fed Yellen, BoE Carney and BoJ Kuroda participate in a policy panel “at the heart of policy: challenges and opportunities of central bank communication”. We don’t expect them to do a putsch on current policy thinking. Chicago Fed Evans, ECB Nouy and ECB Lautenschlaeger also appear at the event. The speech with most market moving potential is probably the one from Atlanta Fed Bostic. He’s a relatively new Fed governor who votes on policy next year. He talks on the economic outlook and monetary policy and will probably for the first time give more insight on his thinking and views for 2018. The rotation in voting regional Fed governors is expected to produce a more hawkish profile next year with Cleveland Fed Mester (moderate hawk), SF Fed Williams (moderate), the still to be appointed Richmond Fed governor (anticipate hawk) and Bostic (unknown) replacing Chicaga Fed Evans (dove), Philly Fed Harker (moderate), Minneapolis Fed Kashkari (arch dove) and Dallas Fed Kaplan (moderate).

The Netherlands and Germany tap market

The Dutch debt agency sells up to €3 bn in a 10-yr DSL auction (0.75% Jul2027). The bond on offer traded stable in ASW spread terms going into the auction, but is a tad cheap on the Dutch curve. We expect a plain vanilla auction. Germany holds a €5bn Schatz (0% Dec2019) auction. Total bids at the previous 4 Schatz auctions averaged €5.31B, but the new commitment by the ECB on APP could create stronger demand today.

Bearish sentiment on bond market remains in place

Asian stock markets trade weaker overnight, with Japan this time slightly outperforming. The US Note future is stable, suggesting a neutral opening for the Bund.

Today’s eco calendar heats up, but eco data might only be of second tier importance. Risk sentiment on European stock markets remains fragile, but the German Dax approaches first support around 13 000. The downward equity correction hasn’t run its course yet, but might slow. However, it failed to support core bonds last week/yesterday. A speech by Atlanta Fed Bostic will be closely monitored (see above). If he indicates willingness to hike rate 3 times next year, we might get more repositioning (bear flattening US yield curve). The ECB’s conference and the stand-off between US House & Senate Republicans on tax reforms are wild cards.

We have a longer term US Treasury negative bias and aim for return action towards the 124-06 low. Also for the Bund we favoured a sell-on-upticks (around 163.43), targeting 160.24. Support levels in yield terms played their role (German 5y: -0.4%, 10y: 0.3%). Underlying growth momentum remains very strong in EMU and warrants higher (LT) rates. With ECB policy cemented for another year, this should result in a steeper EMU yield curve.

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