Core yields holding near recent top head of US CPI

KBC Market Research Desk KBC Bank

Rates

Core bonds traded with a slightly negative bias yesterday, but the Bund and the 10-year Note future held tight ranges. There were no important eco data. Global equities regained further ground after last week's sell-off but the jury is still out whether this will mark the start of a sustained bottoming out process. US yields increased up to 1.5bp with the belly of the curve underperforming and the 30-y outperforming (-1.4 bp) The US 10-year yield touched a minor new correction top intraday. The German yield curve rose about 1 bp,. The 2-yr outperformed (-0.9bp). 10-y yield spreads versus Germany narrowed slightly in line with the global positive risk sentiment. Portugal (-5 bp) outperformed. Greece (+19 bp) underperformed.

The US Note future trades with a slightly positive bias in Asia. Asian equities opened strong after a positive close on WS yesterday, but momentum eased during the session. The Bund is expected to open little changed.

Today, the calendar is again thin. There are few important data in Europe. US NIFB small business confidence is expected to rebound from 104.9 to 105.3 after a decline last month. Fed's Mester will speak on Monetary policy (with Q&A). Will she give her view on recent market developments? This morning, US yields are declining slightly as Asian equities return part of earlier gains. US equity futures are also slightly in the red. Global risk/equity sentiment remains a wildcard for Bond trading. For now we assume more consolidation going into tomorrow's key US CPI release. Yields stay close to the recent highs. The Budget plans of the Trump administration will probably have to be scaled back substantially to get approval from Congress. Even so, the debate on government spending and deficits continues and will put a floor for US yields.

Strong growth momentum, rising inflation (expectations) and the global turn towards monetary policy normalization are structurally negative factors for core bonds medium term. US and German yields cleared resistance levels earlier this year and moved at high-speed towards next targets. The trading band for the US 10-yr yield is 2.64%-3.05%. Correction towards the lower bound could be used to put up short positions in the Note future. The German 10-yr yield's trading band is 0.62%-1.06% trading band.

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KBC Market Research Desk

KBC Bank

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