One-off repositioning on US Senate tax vote

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One-off repositioning on US Senate tax vote

Global core bonds lost part of Friday’s gains yesterday. The move was limited to a one-off repositioning in the Asian or European opening with the positive US Senate tax bill vote the main incentive. It’s now up to House and Senate lawmakers to find common ground for a bill, preferable before year-end. More worrying headlines on the US political scene about Mueller’s investigation into Russia-links in Trump’s presidential campaign team perhaps hampered a more enthusiastic reaction. Core bond trading was rather lethargic after the opening move and confined to a tight sideways range. The US Note future slightly outperformed the Bund in the process as US equity markets went off in a swoon going into the US closes. Investors probably have Friday’s payrolls and next week’s FOMC meeting in mind. The European eco calendar contained only second tier and slightly disappointing data (PPI, Sentix investor confidence).

In a daily perspective, the German yield curve bear steepened with yields up to 5.3 bps (30-yr) higher. The US yield curve bear flattened with yield changes ranging between +3.5 bps (2-yr) and +0.2 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany ranged between +1 bp and -1 bp with Spain/Italy (-4 bps) and Greece (-11 bps) outperforming.

Today’s eco calendar contains the final EMU services PMI (expected to be confirmed at 56.2) and the US non-manufacturing ISM. The ISM is expected to decline from a record high 60.1 in October to 59 in November. That remains a very strong reading, but markets lately didn’t get lured into reacting on strong activity data.

Front end of US yield curve rises further

Asian stock markets trade mixed overnight, though risk sentiment is deteriorating towards the end of the session. The US Note future and Brent crude give no indication for the start of trading, suggesting a neutral opening for the Bund.

The main item on today’s agenda is the US non-manufacturing ISM which is expected to remain very strong. In theory, that’s negative for US treasuries, but we don’t expect a strong reaction. The front end of the US yield curve continues to underperform, discounting already two rate hikes for 2018 going into next week’s FOMC meeting. We expect the new dot plot to show the Fed’s determination to hike rates 3 times next year. Rate markets are for the first time in the current tightening cycle (rapidly) catching up with FOMC forecasts.

Technically, US Treasuries will probably trade in the 123-27 to 125-14+ range going forward (March 2018 contract!). This corresponds with a 2.3%-2.47% band in yield terms. The German Bund set a new contract high, but this wasn’t confirmed by a drop of the German 10-yr yield below 0.3%. We don’t anticipate such move and suggest putting short positions around current levels. Strong current and expected growth and the ECB’s slow normalisation process warrant such move.

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