Fed wants stronger forward guidance, but not by YCC

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German Bunds underperformed US Treasuries yesterday. The move started late on Thursday on a technical footing following the rejected test of -0.485% support in the German 10-yr yield. Core bonds later reacted asymmetric to risk sentiment. They initially couldn't profit from weaker European stocks, but later suffered as risk sentiment made an intraday U-turn following positive signs of early trials of experimental coronavirus vaccines. Positive surprises from June US ADP employment report and manufacturing ISM didn't impact trading. It's hard to draw forward looking conclusions given the current exponential rise in US COVID-19 cases which forces US states to pause, delay or reverse the economic reopening. It was nevertheless striking that US Treasuries came off worst intraday levels immediately after the data. German yields added 3.2 bps (2-yr) to 6 bps (10-yr) in a daily perspective. Peripheral yield spreads vs Germany narrowed by 5/6 bps Spain/Italy and by 9 bps for Greece. US yields added 1.2 bps (30-yr) to 2.4 bps (5-yr) with the belly of the curve outperforming the wings.

FOMC Minutes of the June Fed meeting revealed that introducing yield curve control isn't on top of Fed governors' minds. More study on the issue is needed, though participants indicated that the Australian variant (3y) is most relevant. Fed governors do agree on finetuning forward guidance. It's an open debate whether this should focus on policy rates and/or asset purchases. Discussion also remains on the form: tying it to economic metrics (unemployment rate or inflation) or making it time-dependent. The front end of the US yield curve outperformed in the run-up to the Minutes and fell prey to some small profit taking immediately after.

Asian stock markets are positively oriented this morning with China outperforming even as the US readies more sanctions over the security law in Hong Kong and over human-rights abuses against Muslims. The German Bund and US Note future tread water. Today's eco calendar contains US weekly jobless claims and June payrolls. Yesterday's ADP swings showed the difficulty to both predict and interpret the June labour market update. Weekly jobless claims gain more importance in coming weeks. Risk sentiment will continue to set the tone for trading on other markets. We acknowledge stock market's resilience, but continue to err on the side of caution medium term. Technically, the US 10-yr yield is drifting to the lower end of the 0.54%-0.78% sideways trading range. The Fed's implicit yield curve control remains at work (open-ended, unlimited QE). The German 10-yr yield bounced off first support just above -0.50%.

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