No major changes in bond markets, but bid remains

The Bund opened strong yesterday, but rapidly slid in a volatile sideways trading range where it stayed during the session. In a daily perspective, it eked out small gains though but again couldn’t close above the 155 handle. The 10-yr approached the key 0.50% but never really tested it. In a daily perspective the curve flattened with German yields up to 0.2 bps higher at the front end and up to 3.9 bps lower further out the curve. In the US the curve steepened with the shorter end up to 2 bps lower and the longer end up to 2 bps higher.

The early Bund strength stemmed from some risk-off sentiment coming from Asia (see Sunset). The Bund retested Wednesday’s high, but failed to move substantially higher. EC economic confidence was slightly stronger than expected but ignored. SF Fed governor Williams said that the Fed was likely to raise interest rates later this year and called first quarter growth an anomaly. US weekly jobless claims were a tad above expectations. The 7-year Note auction went well. The US Note future tried to rally on the auction results, but erased the gains going into the close. On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened up to 8 bps (Portugal).

Busy eco calendar; G-7 to conclude.

In April, euro zone M3 money supply is expected to have picked up further from 4.6% Y/Y to 4.9% Y/Y. More important will however be the lending data. Last month, lending to non-financials weakened again following two consecutive monthly gains. We look out whether the uptrend will be resumed in April. In Spain, inflation is expected to have increased by 0.2% M/M in May, which should push the annual rate slightly up, from -0.7% Y/Y to -0.6% Y/Y. In the US, first quarter GDP will be substantially downwardly revised. The consensus is looking for a revision from 0.2% Q/Q annualized to -0.9% Q/Q annualized. The major source of the downward revision will be net exports, while also inventories will be weaker. Recently, there was a lot of commotion regarding seasonal adjustment factors which would have depressed Q1 GDP both this year and in the previous years. The BEA will revise its methodology, but results will only be available in July. The Chicago PMI is expected to show a limited further increase from 52.3 to 53.0 in May. We believe that the risks might be for a slightly stronger outcome. The final reading of U. of Michigan consumer confidence for May is expected to show a limited upward revision to 89.5 after the first estimate showed a sharp drop from 95.9 to 88.6. Also here, we see risks for a slightly stronger outcome.

Good 7-yr US Note auction

In the US, the Treasury ended its end-of-month refinancing operation with a solid $13B 2-yr FRN auction and a well bid $29B 7-yr Note auction. The latter stopped through the 1:00 PM bid side and the bid cover was in line with the past year’s average (2.49 vs 2.48). Bidding details were good as well with a strong indirect and dealer bid and a recovering direct bid.

Today: test of 0.50% support in German 10-yr yiel

Overnight, Asian stock markets trade slightly positive. Volatility remained high in China with stocks recovering from 4% losses early in the session.
Yesterday, Chinese equities eventually lost more than 6%. Japanese eco data were slightly better than expected (see currencies). The US Note future trades marginally higher. Greek newsflow was mixed for markets. On the one hand, IMF Lagarde said that a Greek exit was a potential and G7-officials indicated that a deal by Sunday was very unlikely. The ECB also warned of contagion risks if Greece and its creditors don’t find a solution soon. On the other hand, an IMF spokesman said that Greece can choose to bundle the June repayments and pay them all in one time at the final day of the month. That means that the Greek tragedy may be prolonged with another month.

Today, the eco calendar heats up, especially in the US. Risks are on the upside of expectations except for the GDP revision (-0.9% Q/Q annualised expected). The latter is outdated though and might be less relevant for markets. Better US data should prevent a break higher from the US Note future, which flirts with 127-19 resistance (see graph). However, we add that sentiment was positive for the US Note future of late so don’t take a negative reaction for granted. End-of-month extension buying is positive as well while Greece is a wildcard. The Bund future took out the 38% retracement level from the May sell-off (154.97) this week. If this break is confirmed by a break of the 10-yr yield below the similar support level (0.50%), it would be a bullish signal for the Bund.