Core bonds continue to trade with positive bias

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Yesterday, core bonds traded with a modestly positive bias in a calm opening session of the week, but lost temporarily altitude on a batch of stronger, but second tier, US eco data (pending home sales & Dallas Fed manufacturing survey versus slightly weaker Chicago PMI). However, Treasuries recouped soon the losses while German bonds even eked out some, albeit modest, gains. In yield terms, US Treasuries were virtually unchanged while German bunds shed up to 2.5 bps (5-year outperformed). Volumes were as usual very low. In the morning session, EMU inflation and money supply reports confirmed the very low inflation and the sluggish lending climate. Inflation was reported unchanged at 0.5% Y/Y. Whether these data or some end-of-quarter repositioning drove core bonds higher in the morning is difficult to tell.

Today, the eco calendar remains interesting with the euro zone (final) manufacturing PMI and the US manufacturing ISM, the euro zone unemployment rate and also German unemployment figures.

According to the first estimate, the euro zone manufacturing PMI surprised on the downside of expectations, falling from 52.2 to 51.9, while a stabilization was expected. Available national data showed that sentiment weakened in both Germany and France. The final reading is forecast to confirm this outcome. We have no reasons to expect a material revision from the first estimate. Also in the euro zone, the unemployment rate is expected to have stabilized at 11.7% in May, following a slight drop in April. As we expect that the unemployment rate will extend its downtrend only very gradually, we believe that the consensus is fair. The risks, if there are any, might be for a downward surprise. In the US, the manufacturing ISM is forecast to show a little improvement in June, from 55.4 to 55.9. In June, most regional business confidence indicators surprised on the upside and improved slightly further and therefore we believe that also the manufacturing ISM might surprise on the upside. Seasonal adjustment factors are however slightly negative, which might be a risk factor.

The ECB holds its weekly MRO tender that will shape liquidity conditions in the week ahead (last week of the reserve period that ends July 8). Yesterday, eonia surged higher leading to a fixing at 0.336%. This is typically for an end-of-month/quarter and won’t have an impact on eonia trading further out. Regarding the MRO tender, the €115B allotment of last week expires, while the (average) autonomous factors will decline by an ECB-estimated €12.8B (add to available liquidity). Banks will repay €4.48B 3-year LTRO loans. We will report on the outcome of the MRO tender in our Sunset and the implications for eonia..

Overnight, Asian equities trade mixed, with Japan outperforming despite a slightly weaker Tankan. US Treasuries are slightly lower and the dollar stabilizes following a decline yesterday. Fed governor Williams (see headlines) had little impact on trading. Ukraine’s President warned that a new phase to liberate the East territories started after peace talks broke up. The market ignores it for now, but it might potentially return to the fore later on.

Regarding bond market today, the eco data are interesting, but only for the ISM we see risks (on the upside), which might be a bond negative. There are no events, other than the MRO tender that is no market mover though. From tomorrow onwards, the calendar becomes more interesting. So today, we concentrate whether the new quarter start with investors taking new positions. Bonds have done extremely well in H1, so will there be some repositioning out of bonds? On the other hand, bond sentiment is bullish and so are the technicals.

Technically, for US Treasuries, the Note future closed above the top of its tight ST sideways range (123-25- 124-23+/25+) and again above the uptrendline (125 today). The 10-year yield is near the key 2.46/40 support. A drop below would be technically very relevant. The Bund has broken above the upper bound on its sideways range and the 10-year German yield is below the 1.29% low. Concluding, the ST technical pictures for the Bund and the US Treasury Note are bullish.