Core bonds under mild pressure as sentiment soured

Rates

On Friday, global core bonds initially stayed under downward pressure, as bond sentiment remained fragile. US Treasuries eventually outperformed Bunds, recouping losses end even eking out modest gains (in tune with stronger yen and weaker equities). Technically, the Bund tested first support (neckline double top) at 162.47 twice, but a break didn’t occur (intraday low 162.20). SF Fed Williams said that shrinking the Fed’s balance sheet will cause rates to go up, but it’s not disruptive in a healthy economy. In conjunction with other Fed speakers it becomes likely that expanding fiscal policy will bring forward the timing of the Fed’s balance sheet shrinkage. In a daily perspective, the German yield curve bear steepened with yields 3 bps (2-yr) to 5.8 bps (30-yr) higher. In yield terms, the German 10-yr yield approaches the post Trump high at 0.45%, while the 30-yr tested yield resistance at about 1.20%. The US yield curve bull steepened with yields flat (30-yr) to 3.3 bps lower (2-yr).

Donald Trump’s inauguration speech was mainly an attack on Washington insiders and political elites. He didn’t give details about future policies. His first executive order directed federal agencies to take any steps to limit or scale back implementation of the Affordable Care Act until Congress repeals it. On his website, the White House laid out what it calls a "bold plan" to create 25 million new jobs over the next decade and return to 4% annual economic growth. It would mark the most jobs created under any U.S. president ever. Specifics are few except that the he will lower tax rates in every bracket, simplify the tax code and reduce the corporate tax rate, beside renegotiating trade deals. In that case, rates might have to be raised faster to keep inflation in check, as the economy is near full employment and close to the inflation target.

Thin calendar to start new week

January EMU consumer confidence is expected to print at -4.8 from -5 in December, following good progress in the past months. It will be the highest reading since March 2015 (start QE) and the second highest since the previous cycle high in June 2007. Belgian consumer confidence for January, released on Friday, improved substantially. We expect a strong figure, confirming that Q1 started on a bright note.

Higher fuel prices/higher inflation could be negative and therefore we don’t put risks on the upside of consensus. ECB’s Draghi and Praet speak. Following an intended dull meeting and press conference last Thursday, we don’t expect them to break new ground. If eco data continue to improve and inflation moves a bit higher, we expect the ECB’s very accommodative policy stance to come under pressure.

The Netherlands, Germany, Italy and US tap market

This week’s scheduled EMU bond supply comes from the Netherlands, Germany and Italy. Tomorrow, the Dutch debt agency taps the on the run 5-yr DSL (€2-3B 0% Jan2022). On Wednesday, the German Finanzagentur holds a 30-yr Bund auction (€1B Aug2046). On Thursday, the Italian debt agency probably taps the on the run 3-yr and 7-yr BTP in combination with a longer-dated one (15/20/30) depending on market demand. The exact lines and amount on offer still needs to be announced. In the US, the Treasury starts its mid-month refinancing operation tomorrow with a 2-yr Note auction. On Wednesday, they hold a 2-yr FRN and a 5-yr Note auction. The Treasury concludes on Thursday with a 7-yr Note auction.

Technically, sentiment-driven trading

Overnight, most Asian stock markets trade positive with Japan underperforming on the back of a stronger yen. The US Note future has an upwards bias. We expect the Bund to open somewhat stronger.

Today’s eco calendar only contains EMU consumer confidence and speeches by ECB’s Draghi en Praet, but we don’t expect them to influence trading (see above). Trading will likely be low-volume, technical in nature and sentiment-driven. From a technical point of view, we put in place new short positions in the US Note future after the umpteenth failed test of 125-09 resistance. First support kicks in at 122-14+. We expect US markets to further align with the Fed’s scenario of 3 rate hikes this year.

ECB Draghi didn’t alter the ECB’s policy last week, stressing the lack of underlying inflation pressure. Technically, the German Bund closed below 162.62 support (neckline ST double bottom), but recovered in later US trading and opened higher today. We need a more reliable close below to focus on the downside and more particular on the range bottom (160.72). The underlying economic picture in EMU improves further, also suggesting more downside despite the ECB’s bond buying programme.

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