German bonds frozen in narrow range near the highs

Rates

US and German bonds took a different path yesterday. German bonds had another quiet sideways oriented session, undisturbed by the equity correction. Economic data were once again ignored. US Treasuries had a more difficult day and were beaten heavily during the US session. No immediate trigger was available, but profit taking on recent gains and a poorly received 7-year Note auction certainly played a role. In a daily perspective, the German yield curve steepened marginally with yields down to 1.5 bps at the shorter end and to 1 bps higher at the very long end. The US curve steepens too, with yields up 0.8 bps at the 2-year but up 7.2 bps at the very long end. The US 10-year yield regained the neckline of a double top (similar for the US 5-year yield). Equities traded volatile, but limited daily losses. The US/German yield is widening again (to 177 bps). It might be a sign that the fast spread narrowing of 25 bps over the past week has run its course. Peripheral 10-yield spreads were 2 to 3 bps lower, as risk off sentiment dissipated during the session.

The eco calendar is thin today with only some second-tier data in Europe, the third estimate of US Q4 GDP and final reading of March University of Michigan consumer confidence. Fed’s Fischer and Yellen (after European close) are scheduled to speak.

The third reading of US Q4 GDP is expected to show a marginal upward revision, from an annualized 2.2% Q/Q to 2.4% Q/Q. The data are however outdated and revisions will probably be small, which should have no impact on markets. According to the first estimate, Michigan consumer confidence weakened significantly in March, from 95.4 to 91.2, but the final reading is expected to show a limited upward revision to 92.0. We believe that the risks are for a stronger outcome as also the weekly Bloomberg indicator picked up in the previous weeks, probably due to better weather conditions and as consumers are starting to adapt to higher gasoline prices.

In the US, the 7-year Note auction was poor, just like the 5-year on Wednesday. The auction stopped at 1.792%, a full bps above the WI bid of 1.783%. The 2.32 bid/cover was the smallest since May 2009. Dealers were missing at the auction and therefore the takedown of Indirect bid was good. However, buy-side demand was rather poor again.

Overnight, Asian stock indices trade mostly positive, with the noticeable exception of Japan and Taiwan. Japanese eco data, including CPI, were in line with expectations. The US Note Future trades flat, which is also the case for the key FX crosses. There was no key event news overnight, pointing to a calm start of the trading session with European equities maybe slightly higher at the opening.

Today, the eco calendar remains thin. Second-tier national eco data in EMU won’t impact markets. In the US, the second revision of Q4 GDP is outdated and will soon be classified. Michigan consumer confidence might surprise on the upside, which is a negative for US Treasuries, but maybe offset by month and quarter end extension buying which is a negative for bonds and may start today. The wildcard is a late eve speech of Chairwoman Yellen on monetary policy. After the FOMC meeting, she spoke in name of the FOMC. Now, she may speak a little freer. Will she try to massage markets away from their dovish interpretation or was it her objective? We’ll know maybe more this evening. Technical elements and risk sentiment will be the main factors during most of today’s trading. We go for sideways trading in the US market (and Bund).

Technically, the US 5-yr and 10-yr yield rose now again above the key support levels (1.4% & 1.94%) which had become resistances, showing signs of indecisiveness. US traders are unsure which way to choose, maybe as uncertainty about Fed policy hasn’t dissipated. Fed’s Bullard sees substantial risks if rates are kept at zero for too long. Vice Fischer showed unease about the ability of the Fed to control rates once they are increased. The technical picture for the Bund remains bullish.