New 2018 high for US 10-yr yield

KBC Market Research Desk KBC Bank

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Global core bonds traded mixed on Friday. The Bund hovered sideways in a narrow range while the sell-off in US Treasuries continued. There was no big news behind the moves. Oil prices rebounded during US trading, but stock markets faltered. US yields increased by 3 bps (2-yr) to 5 bps (10-yr). The US 2-yr and 5-yr yields reached new post-crisis highs (2008-2009).The US 10-yr yield set a new 2018 top (2.97%), paving the way for key resistance at 3.05%/3.07%. European investors probably kept this week's ECB meeting in mind. Rumours suggested this weekend that the central bank could postpone any communication on further normalization steps to July. ECB Draghi warned that the growth cycle has peaked, while expressing more confidence in the inflation outlook. The German yield curve steepened with yield changes ranging between -0.7 bps (2-yr) to + 0.7 bps (30-yr). 10-yr yield spreads vs. Germany were close to unchanged.

Most Asian equity indices manage to limit losses compared to WS on Friday, with China again underperforming. The US Note future slightly extends losses, suggesting a somewhat weaker opening for the Bund.

Today's eco calendar contains EMU April PMI's and a speech by ECB Coeuré. The EMU composite PMI is expected to record a third straight decline (from 55.2 to 54.8) and suggest a change in trend. The signal from PMI's coincides with recent comments by ECB President Draghi. He warned that the growth cycle has peaked even if there remains sufficient momentum (confirmed by the absolute PMI levels). Draghi also expressed more confidence in the inflation outlook. The combination of the growth and inflation comments might signal rising awareness in favor of policy normalization in order to build a war chest for future downturns. We'll be looking for clues in that direction at Thursday's ECB press conference.

Last week's core bond sell off probably has further to go in the US, with investors lured by key resistance in the 10-yr (see above) and 30-yr yield (3.22%). The German 10-yr yield bounced off key support levels (0.46%/0.48%), consolidating since the end of March. Last week's move suggests the start of a new upleg, but the approaching ECB meeting could be a hampering factor short term.

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KBC Market Research Desk

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