Risk sentiment improved overnight

Rates

Consolidation ahead?

Core bonds gained ground last Friday with US Treasuries outperforming German Bunds. The upleg started in US dealings after a disappointing US payrolls report (apart from wage data) and got an additional boost from a hastily planned press conference by the Chinese Ministry of Finance and Commerce. They reiterated readiness to strike back and contradicted US official talk that both parties entered a negotiation phase. With uncertainty looming over the weekend, investors preferred the safer bet with US stock markets simultaneously losing over 2%. Fed chair Powell, SF Fed Williams and Chicago Fed Evans all kept to the Fed’s script of gradual further rate hikes. They are monitoring trade developments, but it’s too soon to draw conclusions about a possible negative impact on the US economy. At the end of the day, US yields declined by 3.6 bps (2-yr) to 5.9 bps (10-yr). German yields dropped by 0.6 bps (2-yr) to 2.6 bps (10-yr). Peripheral yield spreads vs Germany widened up to 5 bps (Portugal).

Risk sentiment improved overnight. Official US rhetoric on trade softened again, stressing the need for a (long?) negotiation period after placing hawkish trade opening bets last week. News about North-Korean willingness to de-nuclearize gains traction as well. Asian indices post gains of about 0.5%, the US Note future comes off Friday’s highs and USD/JPY is slightly higher. We expect a somewhat softer opening for the Bund.

Today’s eco calendar contains only contains second tier eco data. Risk sentiment on stock markets will probably be the key driver. Overnight moves suggest some calm/improvement compared to last week’s volatile environment. Some investors probably want to remain sidelined ahead of Chinese President Xi Jinping’s speech at the Boao forum. We start the week with a neutral bias for core bonds, suggesting some consolidation.

The German 10-yr yield reached the levels we’ve put forward (0.46%/0.48%) after losing 0.6% support in the wake of the ECB meeting. 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. The trade-related correction lower on US stock markets, pulled long term yields down as well. We argued before though that a full-blown trade war might eventually result in higher US yields if China reallocates its FX reserves away from US Treasuries. We favour sideways action in the short run, roughly between 2.7% and 2.9%.

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