Risk sentiment and Fed speeches will set the tone

Rates

Global core bonds had a strange opening session of the week. They initially lost ground as geopolitical tensions eased slightly during the weekend, but soon found a bottom, gradually returning to opening levels during US trading. Mixed to disappointing US eco data and improving US risk sentiment played no role of significance. The German yield curve bear steepened with yields 0.5 bps (2-yr) to 1.4 bps (30-yr) higher. The US yield curve flattened with yield changes varying between +2.1 bps (2-yr) and -0.3 bps (30-yr). Dovish Fed governor Kashkari sounded supportive of interest rate hikes given fiscal stimulus. 10-yr yield spread changes vs Germany narrowed 1 to 2 bps with Greece outperforming (-7 bps).

Most risk barometers point to a neutral opening to today’s session. Only Chinese equities underperform for a second straight session. US President Trump nominated two new Fed governors, including a vice chair (still subject to Senate confirmation), Richard Clarida, who is known as an inflation hawk. He might flip the balance in the dot plot to 3 additional hikes this year. Markets didn’t react to the news though.

Today’s eco calendar contains German ZEW investor sentiment, US housing data and US industrial production. Recent sentiment indicators disappointed in EMU, suggesting a bigger setback than the projected 88 (current) and -1 (expectations) in the ZEW-indicator. The US data on the agenda generally don’t draw that much of attention. Risk sentiment and Fed speakers will be key. The US is said to delay imposing additional sanctions on Russia, suggesting a further short term improvement of risk sentiment. Regarding central bankers, we especially eye the speech by SF Fed President Williams who will be bumped to the head of the NY Fed and probably keeps the door open to at least 2 more rate hikes this year. Those items suggest a minor downward bias for core bonds today, but definitely within the established consolidation ranges.

The German 10-yr yield reached key support levels (0.46%/0.48%). We think that the slide went far enough against the background of the ECB slowly turning the corner and embracing policy normalization. We turn neutral going forward. The US 10-yr yield lost its upward momentum mid-March. Rising geopolitical risks weighed on risk sentiment and pulled long term yields down as well. We favour sideways action, roughly between 2.7% and 2.9%.

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