US 30-yr yield tested key 3.24% support

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Yesterday, global core bonds eventually closed with marginal gains. While the missile attack on the Malaysian jet dominated news, markets shrugged off geopolitical developments (Ukraine and Gaza). Trading conditions were thin with Japan closed and the eco calendar empty. At the end of the day, the German yield curve shifted 0.3 bps to 0.9 bps lower. In the US, the 2-yr and 5-yr yields added 1.2 bps and 0.8 bps respectively, whereas the 10-yr yield decreased by 1.4 bps and the 30-yr yield shed 3.2 bps. The latter tested the key 3.24% support mark (62% retracement of 2013 yield rally). On intra-EMU bond markets, 10-yr yield spread changes varied between -2 bps and +2 bps.

Today, the US eco calendar heats up with the CPI inflation data, the Richmond Fed index and existing home sales. In the euro zone, the first quarter government debt data will be released and Belgium will tap the market (OLO). EU foreign ministers gather in Brussels to discuss sanctions against Russia. The ECB’s weekly MRO operation (€99.9B one-week loans mature) might draw extra attention following the huge LTRO repayment announcement (€21.5B) last Friday (highest amount since December).

In June, US CPI inflation is forecast to have stabilized at 2.1% Y/Y, the highest level since October 2012. On a monthly basis, CPI is forecast to have increased by 0.3% M/M, partly due to higher gasoline prices. Core CPI is forecast to have increased by a more limited 0.2% M/M with the annual reading stabilizing at 2.0% Y/Y. We expect that higher energy prices will be partly offset by sharp discounts at the start of the summer sales. We have no reasons to distance ourselves from the consensus. The Richmond Fed manufacturing index weakened from 7 to 3 in June, but a limited uptick is expected for July. The consensus is looking for an increase to 5, but after the strong Philly Fed and NY Fed index, we believe that the risks are for an upward surprise. Finally, existing home sales are forecast to have increased for a third straight month in June. An increase by 1.6% M/M to 4.97 million is expected. We believe however that the risks are for a weaker outcome as the housing market recovery remains fragile and limited inventories continue to weigh on sales.

The Belgian debt agency holds this week’s only scheduled EMU bond auction. 10-yr on the run OLO 72 (2.6% Jun2024) and 15-yr on the run OLO 64 (4.5% Mar2026) are the two bonds on offer. The total auction size of €1.5-2B is relatively small and should be easy to digest for investors. The bonds on offer didn’t particularly cheapen going into the auction. OLO 72 trades relatively cheap though in ASW spread terms compared to previous 10-yr benchmarks. Belgium already completed over 70% of this year’s funding need. The auction won’t be supported by bond redemptions.

Overnight, Asian equity markets trade positive with a Chinese outperformance. The Chinese Development Bank reportedly received 1 trillion yuan from the PBOC to support renovation projects, suggesting that the PBOC’s selective easing is larger than expected. There are small positive signs from Ukraine (rebels handed over black boxes, EU/US diplomacy preparing new steps) and Gaza (possible cease-fire) but apart from Asian equities, there are no signs of risk-on sentiment (eg USD/JPY or US Note future).

Today, the eco calendar is interesting in the US but we expect a mixed bag of data which won’t give clear guidance. Geopolitical developments remain wildcards. While the picture remains bullish for bonds, technical elements might cap core bond gains and limit a decline of yields. The German 10-yr yield is about to test the record low and also for US yields there are quite some red flags. The US 10-yr yield approaches 2.46%/2.4% support and the 30-yr yield tested 3.24% yesterday (see above). The environment of weaker eco data and low inflation keeps the hope on ECB QE alive and supports Bund bulls. Geopolitical stress adds to the argument. In this context we cannot be negative for 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.