Equity/commodity sentiment, US politics and supply

Rates

German 10-yr yield closes just above key support

Global core bonds traded mixed yesterday with the US Note future slightly outperforming the German Bund. The Bund opened higher in a catch-up move, but traded sideways afterwards while the US Note future extended gains. Following Tuesday’s industrialized materials sell-off, another, but different commodity took a hit. Oil prices corrected significantly with Brent crude dropping $2/barrel to $61/barrel. European equity moves were limited to the ones recorded in the opening and US stocks murmured around opening levels. So risk sentiment turned neutral following risk aversion in Asia. The eco calendar added little spirit to trading with US ADP employment bang in line with forecasts at a strong 190k.

In a daily perspective, the German yield curve shifted 2.5 bps lower across the curve with the front end underperforming (2-yr: -1.7 bps). The German 10-yr yield closed just above key support (0.295% vs 0.292%). US yields shed 0.2 bps to 1.7 bps with the belly of the curve outperforming the wings. On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened up to 2 bps with Spain and Italy underperforming (+5 bps).

Today’s eco calendar only contains second tier eco data who have no market moving potential. The final EMU Q3 GDP number (0.6% Q/Q) and US weekly jobless claims are up for release. The latter is expected to stabilize around 240k, confirming the health of the US labour market. ECB Draghi participates in panel, but in his capacity as Chair of the Group of Governors and Heads of Supervision so he probably won’t touch on monetary policy.

The French debt agency holds a very small OAT auction, probably to complete this year’s funding. They tap three off the run OAT’s for €3-4 bn: 0.25% Nov2026, 5.5% Apr2029 and 1.75% Jun2039. The Spanish treasury intends to raise €3-4 bn by tapping the on the run 5-yr Bono (0.45% Oct2022, 1.45% Oct2027 and off the run Obligacion 4.7% Jul2041. We expect these auctions to go well.

Equity/commodity sentiment, US politics and supply

Risk sentiment is mixed in Asia this morning with Japan outperforming. The US Note future and Brent crude also suggest a neutral opening for the Bund. Nevertheless, we expect that some weakness is possible as Boersen-Zeitung reported that German deputy FM Spahn said that the government “sometimes considers 50-yr Bonds” and that it will ”focus refinancing on 30-yr Bonds”. The article could trigger some steepening off the German curve with the 10-yr yield bouncing off the 0.3% support area.

The eco calendar has no market-moving potential today. Risk sentiment of equity/commodity markets and US political uncertainty could be the other main drivers and result in some cautiousness. US Treasuries might outperform Bunds with tomorrow’s payrolls and next week’s Fed meeting in mind. The front end of the US yield curve (short future in oversold conditions), discounts already two rate hikes for 2018 and could be prone to some last minute profit taking. We expect the new dot plot to show the Fed’s determination to hike rates 3 times next year. Rate markets are for the first time in the current tightening cycle (rapidly) catching up with FOMC forecasts.

Technically, US Treasuries will probably trade in the 123-27 to 125-14+ range going forward (March 2018 contract!). This corresponds with a 2.3%-2.47% band in yield terms. The German Bund set a new contract high, but this wasn’t confirmed by a drop of the German 10-yr yield below 0.3%. We don’t anticipate such move and suggest putting short positions around current levels. Strong current and expected growth and the ECB’s slow normalisation process warrant such move.

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