More underperformance of US Treasuries vs Bunds?

Rates

Global core bonds ended mixed yesterday’s with US Treasuries underperforming German Bunds. The main downleg occurred following higher than expected US CPI, and especially wage data. Main European and US equity indices recorded gains to the tune of 0.5%. US yields added 0.6 bps (30-yr) to 2.7 bps (5-yr) on a daily basis. Fed governors Mester, Harker and Bostic spoke out in favour of 1 rate hike this year, but that didn’t change market thinking (no more hikes in 2019, rate cut in 2020) The German yield curve flattened with yield changes ranging between +0.8 bps (2-yr) and -1 bp (30-yr). 10-yr yield spread changes vs Germany varied between flat (Spain) and -5 bps (Italy). The Spanish parliament voted the 2019 budget proposal down, putting Socialist PM Sanchez’ minority government in a corner. El Pais reported that he’ll announce on Friday whether or not to call snap elections. Any underperformance of Spanish bonds (higher political risk premium) should be limited as the lion share of parties are pro-EU. There’s no real risk of a populist government like in Italy.

Asian stock markets are mixed overnight despite stronger than expected, but distorted (by Lunar NY) Chinese trade data. Bloomberg reports that US president Trump is contemplating a 2-month deadline extension (March 1 to May 1) for lifting imports on remaining Chinese goods without a trade deal. Both the US Note future and the German Bund are marginally weaker.

Today’s eco calendar contains the second reading of Q4 EMU GDP (0.2% Q/Q) and December US retail sales. Core retail sales are expected to be strong, backed by labour market strength and rising disposable income. An upward surprise could trigger a negative reaction in the US Note future as we’ve seen after yesterday’s data. More US eco data strength might eventually lead to markets opening up for the possibility of a (final?) Fed move towards the end of the year. Especially if event risks gets out of the way (eg avoiding new government shutdown by the end of the week or reaching a trade deal with China). So the underperformance of US Treasuries vs German Bunds might last today. As UK PM May failed to deliver a plan B by today, the brexit vote in UK parliament is reduced to a vote on giving her a new two-week mandate to negotiate a better deal with Brussels. The kicking the can down the road process might last until the March 21-22 EU Summit. Spillover effects from UK to global markets stemming from brexit developments have been very minor so far. Technically, the German 10-yr yield fell through the lower bound of the 0.15%-0.31%, suggesting a return to the psychological 0% mark or even to negative levels. The US 10-yr yield trades in a 2.49%-2.78% sideways range.

 

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