Core bonds to profit from increased uncertainty?

Rates

Global core bonds gained ground yesterday with US Treasuries outperforming German bunds. European equities opened higher, tracking gains on WS and in Asia but edged lower immediately afterwards. German Bunds profited from the shift in risk sentiment. German yield curve flattened with yield changes ranging between +0.7 bps (2-yr) to -2.9 bps (30-yr). The main main upleg occurred just before US openings following disappointing US retails sales. The December results missed expectations by a landslide, setting multiyear lows. Senate Majority Leader Mitch McConnell said President Trump was going to sign the border security bill into legislation to avoid a government shutdown. However, Trump said he will be issuing a national emergency declaration at the same time to get more funds for his border wall. US Treasuries didn't profit on the news and even paired some of its intraday gains. The US yield curve shifted lower with changes up to -5.1 bps (5-yr). Spanish PM Sanchez was rumoured to announce a date for early elections, but eventually did not make any statements. He did call an extraordinary cabinet meeting for today. Peripheral spreads over the German 10-yr yield remained close to unchanged, with Spain (+3 bps) and Italy (+4 bps) underperforming.

Asian stock markets move lower overnight as trade optimism faded. The two sides reported to be far apart on reform demands as high-level talks in Beijing are making less progress than hoped for. The lack of progress recently motivated Trump to consider a 60-day delay of the March 1 tariffs deadline. On top, Chinese consumer/producer inflation for January fell short of expectations. Global core bonds opened neutral this morning but we expect the uncertainty to support the upward bias today.

Today's economic calendar contains UK retail sales for January and December trade balances in the EMU. ECB's Coeuré speaks in New York. The US publishes the Empire Manufacturing and the University of Michigan Sentiment gauges for February. The former, a confidence gauge for the industry, is expected to recover to 7.0, after it fell to 3.9 in January. The latter, a consumer confidence gauge, is also expected to rebound to 93.5 (vs. 91.2 last month). A new disappointing reading could pile on yesterday's weak retail sales and worry investors some more, supporting core bond.

Technically, the German 10-yr yield fell through the lower bound of the 0.15%- 0.31% range, suggesting a return to the psychological 0% mark or even to negative levels. The US 10-yr yield trades in a 2.49%-2.78% sideways range.

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