Asian equities trade with gains up to 0.5%

Rates

Yesterday, global core bonds took a breather after a constructive session on Monday that was driven by speculation on more ECB monetary easing (and weak IFO). There was no strong directional bias in trading, as traders were more occupied by (curve) positioning. This resulted in a steepening of the US curve, despite strong consumer confidence and Richmond Fed manufacturing surveys. The headline durables were strong, but the details were mixed, leaving the market unmoved upon publication. The strong 2-year Note auction may have led the short end to small gains. The longer end was hit though, keeping the 10-year yield near the 1.40% key level. Profit taking on previous flatteners may have played a role. The German curve flattened with the 2s and 5s up 1.6 and 1 bp, while the 10s and 30s were down about 1 bp. There were no European eco data releases and no new important comments of policymakers. The German Bund traded in a 20-tick range below yesterday’s record high (151.09). Some profit taking on the short end and maybe some extension buying on the long end may explain the German curve movement.

On intra EMU-bond markets, peripheral bonds outperformed for a second straight day. ECB Draghi’s hint over the weekend of an increased likelihood for ECB QE aids positive sentiment. 10-yr yield spreads versus Germany shed up to 8 bps (Spain), with only Portugal underperforming (+1 bps).

Today, the eco calendar remains thin in Europe with only some national confidence indicators and French jobseekers data (after market), while in the US the agenda is empty. Regarding supply, the US will tap the market with 5Yr Notes & 2Yr FRN.

The Fed Minutes of the July 14/28 discount rate meetings revealed that the board of governors rejected the demand of 3 regional Fed banks (Dallas, Philadelphia and Kansas) to raise the discount rate to 1% from 0.75% previously. These governors want to take the spread with the Fed funds target back to pre-crisis levels. Similar demands at all of 2014 meetings were always rejected. We suspect the Fed doesn’t want to seam confusion by raising the discount rate in the current phase of the cycle where debate on a normalization of policy flares up. The increase of the discount rate is more a symbolic gesture than a change in the policy stance. However, it might be interpreted wrongly and lead to premature speculation on start of the normalization.

The Finnish debt agency announced the launch of a new syndicated benchmark. The 6-yr bond (Sep2020) is expected to be priced today. Initial price takings are in the MS -10 bps area. We expect Finland to raise around €3-4B. Year to date the Finnish debt agency raised 44% of this year’s expected funding need (€12.5B).

The US treasury started its end-of-month refinancing operation with a solid $29B 2-yr Note auction. The auction stopped a little through the 1:00 PM bid side with a good bid cover (3.48 versus 3.35 average this year). The buy-side takedown figures were very mixed, but the strength of the indirect bid made up for the weak direct bid. Today, the Treasury continues its operation with a $35B 5-yr Note auction and a $13B 2-yr FRN auction. Currently, the WI of the 5-yr is trading around 1.66%.

Overnight, Asian equities trade with gains up to 0.5% with Japan underperforming. On the geopolitical scene, Israel and Hamas reached a cease-fire accord brokered by Egypt. Talks between Russian president Putin and Ukrainian president Poroshenko were indecisive though Putin called it a positive start. These events had no impact on global trading though. The US Note future is marginally higher this morning.

Today, the eco calendar is empty apart from some regional EMU confidence indicators. These won’t influence global trading though which means technical factors come into play. End-of-month extension buying and the current bullish sentiment on bond markets are positive factors. Overbought conditions (Bund), supply (US Note future) are negative elements. Overall, we don’t have a strong view for today’s trading session.

The Jackson Hole meeting made it clear over the weekend that the likelihood of ECB QE increases. This boosted bonds further with another low for the German 10-yr yield (<0.95%). While we don’t prefer to buy Bunds at such lofty levels, the uptrend (in price terms) remains intact.