Core bonds sell off on Greek deal

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Global core bonds were hit by Greek optimism. However, throughout the day hopes on a deal (Monday evening) faded with the deadline postponed towards the end of the week. However, markets are clearly optimistic that there’s a basis for an agreement and that it will likely be signed off at the EU Summit (Thursday/Friday). It won’t be a nice deal and it is even highly likely that more needs to be done before there is a formal deal, but the creditors probably decided that for geopolitical and financial market reasons a deal was needed. Markets in any case vote for a “yes”. EU leaders gave PM Tsipras 48 hours to make the final push needed to satisfy creditors and end a five month standoff. While markets are convinced a deal is on the horizon, chancellor Merkel said “the new Greek proposal was a step forward, but we are not yet where we need to be. Hours of the most intense deliberations lie before us.” There were still pessimistic sounds coming amongst other from Schaeüble, Noonan and the IMF (Lagrade: lack of details). Also the hurdle of a positive vote in the Greek parliament remains to be taken and looks to be a prerequisite for Germany to ask the agreement of the Bundestag. So, while a good step towards deal has been taken, some risks remain. Intra-EMU spreads collapsed by about 30 bps (Italy/Spain)

In a daily perspective, the German curve bear steepened with yields 1.5 bps (2- yr) to 16.5 bps (30-yr) higher. US yields underperformed Germany in the 2-5yr sector, but outperformed at the longer end. Indeed, if Grexit would turn out a bad dream of the past and thus diminish market risk, the Fed might move earlier than otherwise. Finally, the US curve also bear steepened with yields up between 4.1 (2-yr) and 11.5 bps (30-yr). According to trading desks, the absence of real money buyers, a result of stratospheric high prices driven by ECB activity, led to a violent selling from trading books. In the intra-EMU market, spreads collapsed by about 30 bps (Italy/Spain)

Well-filled eco calendar, Fed Powell talks and supply

In June, the euro zone the composite PMI is forecast to have dropped for a third consecutive month, albeit only marginally. The consensus is looking for a decline from 53.6 to 53.5, due to a drop in the services PMI (53.6 from 53.8). The manufacturing PMI, on the contrary, is forecast to show a stabilization in June following a limited uptick in May.

The main question will be whether escalating tensions in Greece had an impact on business sentiment. We believe that the risks might be for a weaker outcome. In the US, durable goods orders are forecast to have dropped for a second straight month in May due a decline in civilian aircraft orders. Extransportation however, durables are expected to have rebounded by 0.5% M/M following a slight drop in April. We remain cautious regarding the durable goods orders. New home sales, on the contrary, are expected to have increased for a second straight month in May. The consensus is looking for an increase by 1.4% M/M to a total level of 524 000, following a 6.8% M/M gain April. We believe that the risks are for a stronger outcome Finally, the Richmond Fed manufacturing index is expected to have extended its rebound in June. The consensus is looking for an increase from 1 to 4. Earlier released regional indicators showed a mixed picture. For the Richmond Fed index, we believe that the risks, if there are any, are for an upward surprise.

Today: Already moving towards contract lows?

Overnight, most Asian stock markets trade positive on hopes of a new Greek deal. Chinese stocks return from a long weekend and trade very volatile, erasing intraday losses of -5%. The Chinese manufacturing PMI was a tad stronger than expected, but remains below the 50-mark. The US note future trades with a marginal downward bias.

Today’s eco calendar is well-filled with EMU PMI’s, US durables and Richmond Fed index. Data risks being a mixed bag (see above) for markets. There will again be plenty of headlines on Greece, but recent comments suggest that optimism returned. That could further weigh on the Bund and trigger some more spread tightening. Tomorrow, the Eurogroup meets to prepare an agreement for the EU Summit on Thursday/Friday.

Fed Powell speaks on monetary policy and is a wildcard for trading. It’s interesting to hear the view of a Washington-based governor as they tend to vote “in block” when deciding on policy. Earlier, Fed Mester and especially Williams (voter) were hawkish and support our September rate hike call. Technically, we argued that any eventual further down-leg of the US 10-yr yield wasn’t expected to go beyond 2.08% in the near future though (127-23 resistance US Note future). Following yesterday’s move and in case of a Greek deal, we might already be heading towards the contract low again. US supply is a negative for US Treasuries this week.