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Global core bonds lost some ground in a technically uneventful trading session. German Bunds underperformed vs US Treasuries with a soft 30-yr Bund auction drawing some attention. The US NAHB housing index stabilized for a second straight month, soothing fears of a slowdown in the sector. The Fed’s Beige Book shows that most districts record modest to moderate growth. While outlooks generally remained positive, many districts reported that contacts had become less optimistic in response to increased financial markets volatility, rising short-term interest rates, falling energy prices and elevated trade & political uncertainty. German yields added 1.6 bps (2-yr) to 2.4 bps (5-yr) in a daily perspective. Changes on the US yield curve ranged between -0.3 bps (30-yr) and +1 bp (10-yr). 10-yr yield spread changes vs Germany narrowed with Greece (-5 bps) and Italy (-14 bps) outperforming. Greek PM Tsipras narrowly survived a confidence vote while Italian BTP’s enjoy a relief rally after this week’s huge 15y syndicated deal.

Most Asian stock markets record small gains this morning. News flow is thin apart from May’s confidence vote win. Core bonds trade marginally higher. We expect a neutral opening for today.

The eco calendar contains US weekly jobless claims and the January Philly Fed Business Outlook. Claims are forecast to continue hovering near cycle lows, but might start getting distorted by the government shutdown. The Philly Fed index is expected to more or less stabilize, but bear in mind the plunge of the Empire Manufacturing Survey earlier this week. Downside risks to US eco data won’t necessarily translate into stronger US Treasuries though. Q4 earnings and central bank speakers are wildcards. In absence of a strong driver, we expect more of core bond trading within known short term boundaries.

Technically, the German 10-yr yield bounced off 0.15% support, but the picture didn’t change yet. Therefore, the 10-yr yield needs to clear the 0.31% hurdle. The US 10-yr yield lost the 2.75%-2.8% area by the end of last year. This zone now works as resistance in a trading band floored by 2.5%. In both Germany and the US, we think that sufficient bad news is discounted at current levels. Policy normalization expectations in the US and EMU have become extremely/too dovish. However, a clear trigger is needed before declaring a sustained turnaround.

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KBC Market Research Desk

KBC Bank

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