More underperformance of US treasuries on US supply?

Core bonds ended mixed. The German Bund flatlined after a somewhat softer opening while US Treasuries ceded additional ground. Positive risk sentiment at the start of the Eastern-shortened trading week triggered the early losses. US political heavyweights sounded upbeat on early signs of stabilization in New York. We'd remain cautious given the time lag by which the virus spreads through the rest of the US. The Austrian government is the first E(M)U one to put forward a time schedule for the exit strategy of tight lockdown measures, running between mid-April and the end of June. A rather weak $40bn 3-yr Note auction and a late surge on the US stock market (S&P 500 +7%; taking out 2650 38% retracement) weighted on US Treasuries. US yields increased by 3.4 bps (2-yr) to 7.5 bps (10-yr) on a daily basis. German yields added between 0.3 bps (5-yr) and 3.3 bps (30-yr). 10-yr yield spreads vs Germany narrowed by 4 bps with Greece and Italy (-8 bps) outperforming.

Asian stock markets are less ebullient this morning. Most gain around 1% apart from China and India which had some catching up to do. News flow is rather thin. Both the Bund and the US Note future extend yesterday's downward trajectory. Today's eco calendar is extremely thin. The US Treasury continues its mid-month refinancing operation with a $25bn 10-yr Note sale. In absence of other drivers, this could trigger more underperformance of US Treasuries vs German Bunds. Traded volumes are traditionally rather light in the run-up to the long Eastern weekend with most European and US markets closed on (Good) Friday. European markets will follow up on developments on EU-backed fiscal aid to countries in need. European Ministers of Finance (Eurogroup) meet today to discuss options. The most likely scenario is the use of the standing ESM facility to grant credit lines with the aim of tackling the current health crisis. An additional advantage is that in some cases it could trigger unlimited ECB sovereign bond buying through the OMT-programme. Resistance against joint EU-backed debt ("coronabonds") remains too large. The fortunes for riskier assets seem less positive this morning, underwriting the fragility of the risk rebound. Looking beyond today/the next days, we continue to err on the side of caution. We welcome positive steps like the ones taken in Austria, but we probably haven't turned the corner in the coronacrisis yet. Elevated stress on a corporate level could be the next domino.

From a technical point of view, the German 10-yr yield is playing with intermediate technical mark around -0.43%. intraday trading ranges are becoming smaller, suggesting the creation of a new short term equilibrium. For US yields, the Fed's unlimited QE announcement is the de facto start of curve control probably reducing volatility. A trading range between 0.5% and 1% could open up.

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