Core bonds part ways in technical-driven session


In a thinly traded, data-poor and sentiment-driven session, German bonds were sold in the European morning session, but recouped these when US Treasuries slowly rallied higher throughout the US session after holding near flat in the European trading. That left German yields narrowly mixed and US Treasuries moderately higher for the day. US yields at various tenors broke through post FOMC lows (support) giving the price action a technical ground in the absence of economic reports. Oil prices initially declined, but fought back in early US dealings, but it didn’t stop the core bond rally during the US session. Similarly, equities traded somewhat volatile, but closed little changed. The dollar was initially under pressure, but bounced back in the US session. It all had little impact on Treasury trading. Fed governors Evans, Kaskhari and Harker were on the wires, but hadn’t anything particular to tell that could move the market. We note though that both Evans and Harker, two 2017 FOMC voters, included three rate hikes in 2017 in their March projections.

In a daily perspective, US yields declined by 2.7 (2-yr) to 4 (10-yr) bps, while German yields were narrowly mixed with yields ranging from -0.5 bp (2-yr) to +1.5 bp (30-yr). The outperformance versus the US was outspoken. On intra EMU bond markets, 10-yr yield spreads versus Germany range between +2 bps (Belgium, auction) and -5 bps (Portugal, S&P confirms rating) and underperformance of Greece (+8 bps due to upcoming euro group?).


Empty eco calendar, but more US Fed speakers today

The euro area and US eco calendars are completely empty, but the UK February consumer and producer inflation will be reported. Both the UK CPI and the PPI are expected higher. Of course, the inflation situation in the UK differs from the euro area and the US, as the sharp decline of sterling plays a role. On top of it, the US and EMU CPI readings for February are already released. So in case of an upward surprise of UK inflation it might temporarily, but modestly, affect core bond trading. Fed speakers on duty are NY Fed Dudley, Cleveland Fed Mester and Kansas city Fed George. Dudley is the most influential, as he is close to Yellen and e.g. prepared markets on the March move. It is probably too early to expect already new signals from the key policymakers. Fed governors George and Mester (no 2017 voters) are part of the hawkish side in the FOMC. Mester probably sees 4 rate hikes in 2017 and George was maybe the most outspoken hawk who pencilling in 6 rate hikes in 2017 (March projections). This faraway rate dot might have also been from Richmond Fed Lacker though, in which case we put George on the same level as Mester in the FOMC dot plot. So, their comments are interesting, but have no real market moving power.


Consolidation to continue?

Overnight, Asian equities trade constructive. The news flow is again very thin. The FBI director rebuked President Trump on his accusation he was wiretapped by president Obama and confirmed that an investigation in the link between the Trump campaign and the Russians is ongoing. However, the markets didn’t react in a risk-off way. US Treasuries are nearly flat and oil is marginal higher. The dollar is a tad softer.

Today’s, calendar contains again no US or EMU economic reports. UK inflation data may have an marginal intra-day impact. According to an early poll, Macron won the presidential TV debate. That’s a modest risk-on event and may especially profit French bonds and impact the Bund modestly negative. Yesterday’s price action again showed that sentiment in the US Treasury market post FOMC is better than Bund sentiment that still seems a bit impacted by various comments on the exit policy. Yesterday ECB Visco suggested that the time between the end of QE and the increase of rates may be shorter (than previously expected). These comments are not constructive for the bond sentiment, we think. Fed speakers probably won’t have much impact. Their views (hawkish for Mester/George, dovish for Dudley) are well known. 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. Longer term, 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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