Spanish budget vote trigger for snap elections?!

KBC Market Research Desk KBC Bank

Global core bonds lost some additional ground yesterday. The main move occurred early on after US Congress reached a tentative border security deal, suggesting no new government shutdown after Friday. US Treasuries underperformed German Bunds. Mixed ECB headlines caused minor intraday volatility. Risk sentiment flourished with main European indices gaining up to 1% and their US counterparts even up to 1.5%. The German yield curve bear steepened slightly with yields rising by 0.4 bps (2-yr) to 1.3 bps (30-yr). US yields added 1.9 bps (2-yr) to 3.4 bps (10-yr). 10-yr yield spread changes vs Germany narrowed marginally with Greece (-8 bps) and Italy (-7 bps) outperforming. Asian stock markets join yesterday's European/US rally after Chinese media reported that President Xi Jinping will join high-level trade talks on Friday. Additionally, US President Trump showed willingness to extend the March 1 deadline in order to seek a "real deal". Without deal, the US vowed to automatically impose import tariffs on the remaining Chinese goods by that date. Chinese and Japanese bourses outperform this morning. The German Bund and US Note future trade a tad softer with positive risk sentiment expected to last into the European start of trading. Today's eco calendar contains January US CPI inflation data. The headline reading is forecast to show an oil-related deceleration from 1.9% Y/Y to 1.5% Y/Y while the core readings probably shows a smaller slowdown (2.2% Y/Y to 2.1% Y/Y). This would strengthen the Fed's view that they can stay sidelined to assess the situation without having to fear inflation moving away from target. We don't expect big deviations from consensus or a market reaction. Peripheral spreads could see some widening vs Germany given supply (Italy/Portugal) and the budget vote in Spanish parliament. The latter is projected to be voted down, prompting a case for snap elections in April. Central bank speakers include ECB Lane, Fed Mester, Fed Bostic and Fed Harker. Most of them recently spoke and Fed governors are non-voters.

Technically, the German 10-yr yield fell through the lower bound of the 0.15%- 0.31%, suggesting a return to the psychological 0% mark or even to negative levels. The US 10-yr yield trades in a 2.49%-2.78% sideways range.

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KBC Market Research Desk

KBC Bank

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