Resilience on bond markets

KBC Market Research Desk KBC Bank

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Core bonds added gains yesterday with US Treasuries outperforming German Bunds. An attempt to eke out even more gains on disappointing US CPI data failed. The same is true for the effort after oil prices (Brent crude <$60/barrel) nosedived following criticism against Germany by US President Trump about support for the Nord Stream 2 pipeline. Are sanctions against some companies coming? Trump also said to relocate some NATO troops from Germany to Poland. The US 10-yr Note auction went plain vanilla. The US yield curve bull steepened in a daily perspective with yields down up to 5.1 bps (2-yr). There's little investor willingness to bet against a dovish Fed at next week's meeting. The German yield curve bull flattened with yields down 0.5 bps (2-yr) to 1.6 bps (30-yr). 10-yr yield spread changes vs Germany ended close to unchanged with Greece (-3 bps) outperforming and Italy (+4 bps) underperforming. Several EMU countries profited from last week's dovish ECB message, opening the door to additional easing including a potential revamp of QE, to hit the primary (Spain, Italy) and secondary (Portugal) bond market.

Most Asian stock markets cede some ground this morning with Japan underperforming (-1%). US Treasuries follow an intraday move in JGB's. They recently gained momentum as well as the global dovish monetary policy shift put the spotlight on the Bank of Japan. The intraday gains in JGB's/US Treasuries were partly undone after a sloppy 30-yr JGB sale. Today's eco calendar is thin with US weekly jobless claims and import/export prices. EMU FM's meet to discuss EMU budgets and the Italian disciplinary procedure. Any negative impact from a new standoff between Italy and the EMU will be countered by the prospect of additional ECB QE. The US Treasury ends its mid-month refinancing operation with a $16 bn 30-yr Bond auction. Stock markets are losing momentum and could further underpin intraday demand for bonds.

Last week's ECB meeting confirmed our view that the central bank missed out on the previous cycle regarding monetary normalization. The onus is back on potential easing measuring including revamping asset purchases or cutting rates. The German 10-yr yield reached a new all-time low. The Fed is aware of downside eco risks and seems to be ready to cut policy rates as an insurance to keep the economic expansion going. We eye a first rate cut in September, followed by another one in December. The US 10-yr yield tested 2.06% support last week. A break didn't occur. There's probably little room for rebound ahead of next week's FOMC meeting. The end of June G-20 Summit is this month's other high profile event.

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