US Treasuries very modestly lower on Yellen

Rates

Global core bonds had another slow‐go session without a dominating theme. Stronger equities (new all‐time highs for the Dow) were again no obstacle for bonds to rise, even if the rise was very gradually and modest. Bunds slowly grinded higher from start to finish, but gains were small with yield declines of 0.2 to 1.8 bps, the curve flatter. The US Treasuries had a more volatile session, with a noticeable, albeit temporary drop in early dealings. US eco data were mixed, strong PPI and weaker production, but without much impact on trading. In the second part of the US session, the curve flattening resumed. Ms. Yellen gave no new direction in her second leg of the semi‐annual testimony, but the flattening suggests that markets are slightly more sensitive to the idea the Fed may start its tightening cycle a tad earlier. The Beige Book showed no surprises and was in line with the previous one: modest to moderate growth, but nothing spectacular. US yields were slightly up at the 2‐5‐yr part of the curve, while 10‐ and 30‐yr yields dropped by 1 and 2 bps respectively.

Today, the eco calendar remains interesting with the final reading of euro zone HICP inflation for June, the US housing starts and building permits, initial jobless claims and Philly Fed index. Spain (Bono & Obligacion) and France (OAT, OATi & OATei) will tap the market and Fed’s Bullard is scheduled to speak.

According to the first estimate, euro zone HICP inflation stayed unchanged at 0.5% Y/Y, in line with expectations. The final reading is expected to confirm this outcome. We have no reasons to distance ourselves from the consensus, although a downward revision to 0.4% Y/Y in not entirely excluded. In the US, both housing starts & permits have been quite volatile recently. After a rebound in April, housing starts and permits fell back in May. For June, the consensus is looking for a limited increase in both housing starts and permits. Permits are expected to have risen by 3.0% M/M to 1 035 000, while starts are forecast to have increased by 1.9% M/M to 1 020 000. For both, we see risks for an upward surprise as the momentum in the construction sector seems to pick up again,. Also in the US, jobless claims are forecast to have increased slightly in the week ending to 12th of July, from 304 000 to 310 000. Around this period, car plants are starting to take their annual breaks, which might cause increased volatility from now onwards. Finally also the Philadelphia Fed index will be interesting. The consensus is looking for a limited correction, from 17.8 to 16. After the strong Empire State index however, we see risks for a stronger outcome.

The French treasury taps the on the run 2‐yr BTAN (0.25% Nov2016), off the run 10‐yr OAT (4% Apr2018) and on the run 5‐yr BTAN (0.50% Nov2019) for a combined €7.5‐8.5B. The Nov2016 is the only bond that had some pre‐auction cheapening. It also trades relatively cheap on the very short end of the French curve. The off the run Apr2018 on the other hand is expensive whereas the Nov2019 trades also rather cheap. Additionally, the French treasury also taps three inflation‐linked bonds for a total amount of €1‐1.5B. Overall, French auctions tend to go well and we don’t expect difficulties this time either. The Spanish debt agency auctions the on the run 3‐yr Bono (2.1% Apr2017) and off the run 10‐yr Obligacion (5.85% Jan2022) and 30‐yr Obligacion (5.75% Jul2032) for a total amount of €2‐3B. Raising this relatively low amount should be no problem for the agency that’s already 60% funded for the year. We believe that especially the Jul2032 Obligacion offers relative value (asset swap spread comparison) on the Spanish curve. This week’s auctions will be supported by bond redemptions from Austria (€9.5B) and the Netherlands(€12.5B).

Overnight, Asian equity indices trade with small losses. China underperforms due to rumours that a large corporate will miss a bond redemption next week. The US Note future trades with an upward bias.

Today, the eco calendar is well filled. For US figures, we see risks on the upside of expectations ( housing data Philly Fed) whereas the final figure of EMU CPI could be downwardly revised. Overall, we believe technical elements will dominate trading. The German 10‐yr yield closed below 1.20% yesterday and a test of 1.12% all time low seems irresistible. The picture remains bullish and the environment of weaker eco data, low inflation keeps the hope on ECB QE alive. In this context we cannot be negative of Bunds, even if we think Bunds are too expensive and the distance with the all‐time lows too small to set up additional long positions.Wildcards for trading are the earnings season and geopolitical factors (eg Russian sanctions yesterday).