Fed funds futures rise further above par

German Bunds underperformed US Treasuries in the first trading session of the week. A supply announcement by the German Finanzagentur weighed. They tripled their earlier estimate for Q3 bond sales to €146bn (bonds: €74bn). Q4 sales will at most be equivalent to Q3, but too much uncertainty lingers to put forward specific numbers. Germany will sell its first green bond in September (10y) via syndication, with another one coming in Q4 (likely 5y). German yields added 1.1 bp (2-yr) to 2.1 bps (30-yr) in a daily perspective, slightly steepening the curve. 10-yr yield spread changes vs Germany narrowed by up to 3 bps. US Treasuries kept their positive momentum even as stock markets recovered from last week’s beating. End-of-quarter flows could be at play. Interestingly: the Fed Funds future curve again discounts marginally negative US policy rates next year even as Fed Chair Powell keeps rulings them out. They reduce lending capacity in the financial sector by hurting profitability, there’s no academic consensus on their use and the Fed’s known tools have proven their worth. Daily US yield changes varied between -2.8 bps (5-yr) and +0.3 bps (30-yr).

Asian stock market gain up to 1.5% this morning. Regional data include ugly May industrial production reports from Japan and South Korea, but a small June Chinese PMI beat. US States continue to slow, pause or reverse the exit process from lockdowns as the virus spreads over the country. Core bonds show no direction whatsoever. German FM Scholz confirmed in a letter to the president of the Bundestag, Schäuble, that documents received by the ECB “fully meet the requirements of the constitutional court’s May 5 2020 ruling”. The Karlsruhe time bomb, which could have eventually shut the Bundesbank out of the ECB’s asset purchase programme, is thereby dismantled.

Today’s eco calendar contains EMU inflation figures, US housing data, Chicago PMI and consumer confidence. Risks for US figures are tilted to the upside of expectations, but are unlikely to stir trading ahead of ISM, ADP and payrolls releases later this week. Fed Chair Powell and US Treasury Secretary Mnuchin testify before US Congress, but speeches have been published yesterday and don’t contain fresh intel. Risk sentiment remains key with the end-of-quarter causing some strange technical moves as well in the past sessions. Overall, both the German Bund and US Note future have momentum going. Technically, the US 10-yr yield is drifting to the lower end of the 0.54%-0.78% sideways trading range. Risk aversion, the rising tally of US coronacases and the Fed’s implicit yield curve control are at work (open-ended, unlimited QE). The German 10-yr yield is testing first support around -0.50%.

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