US 30-yr yield tests all-time low

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US 30-yr yield tests all-time low

Global core bonds had a cautiously positive bias during the first European trading hours as the oil price took another hit. However, as oil stabilized and European equity markets surged, the topside in core bonds was protected. By that time, the US 10-yr yield tested the October low (1.86%) while the US 30-yr yield approached the all-time low (2.44%). As US dealers entered the market, core bonds slid lower. NFIB small business optimism surged to the highest level since 2006 and weighed on the Treasury market as well. Afterwards US equities slid, but it couldn’t help Treasuries anymore. Daily yield declines were minimal and amounted to less than 1 bp (apart from 30-yr that added 0.4 bps).

The EU Court of Justice (9h30) gets the advocates-general’s advice on whether the ECB’s OMT programme overstepped the limits of the EU Treaty. The advice is often followed by the court, but a final decision is not expected until mid-2015. The advice, and later on the effective ruling, could affect the modulation of ECB QE (expected Jan 22). The most contentious issues are whether OMT purchases can be unlimited or not, whether the pari passu clause is legal or not and finally whether the lines between primary (forbidden) and secondary purchases of sovereign debt are sufficiently defined. If the ECJ formulates its opinion, the German Court is not obliged to accept it. It will look whether there is conformity with the German Constitution. In that respect, it is highly likely that either the EU Treaty needs to be renegotiated or some adaptions will be needed on the 3 points mentioned above before the German Court of Justice considers it in line with the German Constitution. “Worst case scenario”, OMT ends up being limited in size, limited to secondary market purchases and with ECB seniority. That would seriously hollow Draghi’s “Dirty Harry” whatever it takes statement. Any ECB QE would have the same features. This would not undo QE of some of its positive features (diminish supply of available paper), but it would be less forceful.

A robust Christmas shopping season probably supported underlying retail sales. We have no reasons to expect a weaker outcome. In the euro area, industrial production is forecast to come out flat. Earlier released national indicators were quite poor with activity falling slightly in Germany, France, Spain (and Italy?). We believe therefore that euro area production might show a limited decline.

Today, the German Finanzagentur launches a new 10-yr Bund (€5B Feb2025).
In grey market trading, the Bund is 25.2 bps below MS offering no pick-up versus the previous benchmark (1% Aug2024). From an absolute point of view, the record low German yield isn’t enticing either. Overall, we expect a difficult auctions which can only be saved by the fact that demand tends to be relatively higher at the beginning of the year. In the US, the treasury continued with a sloppy $21B 10-yr Note auction. The auction stopped a full bp above the 1:00 PM bidding deadline and the bid cover was slightly light (2.61 vs 2.71 average last year). Bidding details showed an anaemic direct bid while the indirect and dealer bids were ok. Today, the US treasury concludes with a $13B 30-yr Bond auction.

Overnight, Asian equity markets trade in negative territory with a Japanese underperformance on the back of a stronger yen. Overall weakness reflects yesterday’s WS’s intraday crash (>1%). The oil price remains near the cycle low and the US Note future is significantly higher. The risk-off climate suggests a stronger opening for the Bund.

Today, the eco calendar is interesting on many fronts. Eco data include (outdated) EMU Industrial Production and US retail sales. Eco data are neutral for core bonds. The ECJ’s advocates-general advice on OMT (see above) has the potential to drive markets. Negative advice on burden sharing and open-ended buying can trigger risk-off sentiment (spread widening, stronger Bund, weaker equities), as can further downside in commodity prices (copper). Q4 earnings include two major US banks and can again influence the bond market via equity sentiment. Finally, the Fed releases its Beige Book which is expected to confirm the ongoing US economic recovery. Event risks (non-binding expert opinion on OMT (today), the ECB (Jan 22), the Greek election (Jan 25) and the FOMC (Jan 28)), limit upward potential in German/US yields. Sideways trading around or even a test of the recent lows is more likely. If the ECB effectively walks the QE talk, that might change. At previous QE-programmes by BoJ, BoE & Fed, a significant buy-the-rumour, sell-the-fact occurred after the effective announcement, as markets were hopeful it would help. Is this the case with ECB QE? .