Yesterday, global core bonds moved higher during the US session

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Yesterday, global core bonds moved higher during the US session following an dull morning session. US Notes outperformed Bunds by a large margin. Bund yields fell by up to 1.6 bps, while US yields were down 5‐6 bps from the 5‐yr out. There was no big explanatory story and technical factors likely drove the twostage up‐move of US Treasuries. It started when the headline US durables were reported strong, but the spike lower triggered no follow through selling. It was a signal for shorts that it was time to cover some of their positions. The downside was tested in vain over the previous sessions, as important support held (see graph). The justification (pretext) was the weaker than expected core durables. The second push higher occurred after a strong 5‐yr Note auction. The positive, technically‐driven, run of US Treasuries occurred against the background of weakening equities, with the NASDAQ decline again catching the eye.

Today, the economic calendar is well‐filled with initial claims and the final GDP in the US and M3 money supply in EMU. French consumer confidence and Italian business confidence are interesting, but unlikely to affect markets.

Market consensus expects initial claims at 324 000 in the week ending March 22, which would be slightly up from 320 000 in the previous week. Claims seem to stabilize around these levels following a period in which cold weather pushed them higher. We have the feeling that current levels are still slightly above their underlying trend, but it will probably take some time for claims to return to this trend. Therefore, we have no reasons to distance ourselves from consensus. The BLS will publish the final Q4 GDP, which was initially put at 3.2% before being revised to 2.4% in a first revision. Recent data suggest that inventories and construction may be revised higher, but household consumption (PCE) and net exports should be revised lower, leaving the final figure little changed. Q4 GDP is in fact “old” news and therefore unlikely to affect markets The EMU annual growth rate of M3 increased slightly in January to 1.2% Y/Y following a steep drop in December 2013 to 1% Y/Y from 1.5% Y/Y previously. Mr. Draghi attributed this drop to banks cleaning up their balance sheets. For February a slight rebound is expected to 1.3% Y/Y, but the less volatile 3‐month average is expected to have stabilized at 1.2% Y/Y. We think that money growth remained lackluster in February. On the lending side, we are eagerly awaiting some improvement. Each month such pick‐up is delayed, raises the odds that the economic recovery will remain weak and fragile for longer. Indeed, historically, lending to corporates picks up about 3 quarters after growth becomes positive.

The US Treasury continued its end‐of‐month refinancing operation with a strong $35B 5‐yr Note auction. The auction stopped well below the 1:00 PM bid side and the auction bid cover was the highest since September 2012 (2.99).
Bidding details showed strength in all three categories, but especially the Indirect bid was strong. The $13B 2‐yr FRN auction went fine although the bid cover continued to decline and the discount margin continued to rise. Today, the Treasury concludes its refinancing operation with a $29B 7‐yr Note auction. Currently, the WI is trading around 2.275%.

The Italian debt agency taps the on the run 5‐yr BTP (€2‐3B 2.5% May2019) and 10‐yr BTP (€3‐3.75B 3.75% Sep2024). Especially the 10‐yr BTP trades rather rich on the 10‐yr part of the Italian curve. Nevertheless, compared to Spanish Bono’s/Obligacions, there is still some pick‐up. Adding the ongoing strong sentiment towards the periphery, we therefore believe the auctions should be okay. The total amount of BTP’s on offer is also the lowest since last year. Italy will try to raise €2.5‐3.25B with the launch of a new 5‐yr CCTeu (Nov2019).

Overnight, most Asian equities trade positive shrugging off opening losses on the back of a weak WS performance. Signs of the end of a rural Chinese bank run were positive for risk sentiment. Fed Bullard commented on monetary policy, but his comments were similar to previous days.

Today, the eco calendar is very thin. We have no reasons to distance ourselves from consensus so we expect little impact on bond markets. Fed Pianalto is a wildcard but a centrist on the FOMC board and likely to copy the Fed’s message. We have a neutral stance for today.

Technically, the US Note future tested the downside of the 123‐15+ / 125‐ 06+ channel and the 10‐yr yield the upside of the 2.6‐2.8% range for several days. Yesterday, some short covering occurred, taking the Note future away from these key levels. US eco data will be very important next week with ISM/ADP/Payrolls. These could force a new test. A break below/above these technical levels paves the way for a return to 121‐08+ / 3% (10‐yr yield). For the Bund, the picture is different as the possibility of more monetary easing by the ECB remains alive (cf. yesterday’s dovish comments by Weidmann, Liikanen, etc…). We are even approaching the contract high in the run‐up to the inflation releases (Germany on Friday; EMU on Monday). A new test of this level is thus not excluded this week.