Technically, the Bund tested key support around 147.88/77

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Yesterday, core bonds were initially upwardly oriented, erasing some of the post-Yellen losses, but once US traders got involved sentiment soared and bonds slid lower again. The “dots” clearly were not yet digested. However, the downside test lacked conviction too, allowing US bonds to end the session little changed, the 30-year again outperforming. Post-FOMC curve positioning (flattening out of the 5-year as a combination of more hawkish Fed expectations and absence of inflation) is the main issue in the US bond market. German bonds had still some catching up to do on the post-FOMC move of US Treasuries and registered modest losses, with yields up 2 to 3.8 basis points, with here the 2-year outperforming (+1.1 bps). On the low TLTRO up-take, the Bund tested the upside briefly (higher chance on full blown QE (sov. debt buying)), but selling soon kicked in. The US 10-year TIPS auction was ugly, but without impact on the broader market. Rumours that Moody’s had warned the French government it would cut its rating today were denied by the government. We’ll know more this evening when Moody’s announces its decision.

Technically, the Bund tested key support around 147.88/77, but as of the close no break (new ST low 147.72). The test may continue though. The US Note future took out the first target of the double top formation (123-23) and may head eventually to the second one (123-10) today (risk-on after Scottish No prevailed?). The US 5-year yield tests currently multi-year resistance at 1.85%. A break would be very significant. The US 10-year is near major resistance at 2.65/69%.

Today, the eco calendar is thin, both in the US and euro zone, with only some second-tier data on the agenda. The ECB will announce the amount of LTRO repayments, which are a bit more interesting than usual following the low TLTRO up-take. During the weekend G20 Finance Ministers and central bankers meet. The “No” outcome of the Scottish independence referendum may be the main driver in markets. Risk-on sentiment should prevail at the start of the session. US equity futures are substantially higher overnight, following already new record highs for S&P and Dow yesterday.

One day after the FOMC meeting, Fed chairwoman Yellen refrained from touching monetary policy in a speech she gave that was focussed on the human cost of unemployment.

Overnight, most Asian equity markets trade slightly positive with Japan again outperforming on the back of an ever weaker yen. The Scottish “No” vote in the referendum on independence might lead to risk-on sentiment at the start of trading in Europe. However, we would be a little cautious. In the big picture, Scotland is after a small issue and the “No” vote was already largely anticipated in past days. The T-Note is currently moderately lower.

Today’s market calendar is unattractive. No eco data of interest in EMU and UK and also the US leading indicators are commonly shrugged off. Slightly more attention for the LTRO repayment after the disappointing take-up at the first TLTRO. However, the low take-up would point to a modest impact on LTRO repayments. Whatever, it is usually ignored by markets. So, the Scots “No” decision is the only issue at the start of trading. It is a risk-on that should result in a weaker Bund opening. However, its effect should be modest and likely temporary. Technicals and sentiment together with the upcoming weekend might shape trading today. Sentiment has soared, especially in the US Treasury market, but key price support/yield resistances are looming. For the Bund, key support is under test, which if broken warrants a downgrade of the still bullish technical picture (see above). The up-coming weekend is mostly a slight positive.

Concluding, we don’t expect a break of the key technical levels today, early losses may be recouped ahead of the week-end. In a longer perspective, we see the down-move going further, but we want confirmation via a break of the above-mentioned technical levels.