German bonds shrug off German political crisis

KBC Market Research Desk KBC Bank

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In a data-poor opening session of the week, German bonds (and other markets) shrugged off the German political crisis triggered by the collapsed coalition negotiations (see headlines). Opening gains of the Bund evaporated quickly, as also equities and the euro recovered losses. That virtually ended the price action in the Bund which settled in a narrow range close to Friday's lows. The Dax opened weak, testing key support, but no break occurred, leading to short covering and modest daily gains. In US dealings, US Treasuries drifted lower in order- and sentiment-driven dealings with ongoing curve flattening and positioning as the main rationale. The 2-to-10 and the 5-to-30-yr US yield spreads reached new cycle lows at 60.7 bps and 68.4 bps respectively.

In a daily perspective, the US yield curve shifted higher with yields 0.3 bps (30-yr) to 3.5 bps (5-yr) higher. German yield changes varied between -0.6 bps (30-yr) and -+ 0.5 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between flat and +1 bp with Greece up 4 bps.

US existing home sales sole eco release today

Existing Home sales virtually stabilized in October (5.40 M annual rate), after a sluggish rebound in September, which ended a 3-month decline. We side with the consensus view. The lacklustre performance is confirmed by the pending home sales, the mortgage applications and some surveys. Part of the lacklustre performance is due to the low number of homes for sale and is in contrast with the New Home sales series, which set a new cycle high in September. The Existing Home sales report is often ignored. The event calendar is nearly empty too with only a participation of ECB Coeuré at a panel discussion. Coeuré opposed the open-ended nature of the prolongation of the ECB's bond buying programme.

Absence of strong trading themes

Risk sentiment on Asian stock markets is positive with China outperforming (+1.5%). The US Note future or Brent crude trade flat and give no indication for the start of Bund trading. If any, we expect a slightly softer opening.

Today's eco calendar is uneventful. The prospects of new German elections could cause an outperformance of Bunds vs US Treasuries. Risk sentiment remains a potential market driver as well. The German Dax is still in the "danger zone" around 13 000. Losing this technical area would suggest a more pronounced downward correction. Later this week, EMU eco data will play first fiddle. US trading is expected to slow down to a trickle. There are hardly any eco data, trading volumes will be lower than usual because of Thanksgiving (Thursday) & Black Friday and US Congress holds its recess possibly delaying the US tax reform debate. Speeches by European central bankers are a wildcard, but normally no market mover.

Technically, US Treasuries will probably trade in the 124-06 to 125-25 range going forward. This corresponds with a 2.3%-2.47% band in yield terms. The US curve flattening continues with investors putting themselves slowly in line with 2018 FOMC projections. The trading range for the Bund going forward is between 160.24 and 163.43. Any moves towards the topsides of the ranges could be used to put up short positions.

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KBC Market Research Desk

KBC Bank

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