Dutch auction: Hampered by holiday conditions?

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Bund profits only minimal from equity/commodity sell-off

Yesterday, German bonds didn’t really profit from the risk‐off sentiment, generated by a big sell off in the Chinese equity markets and a rout in commodity prices. The benefits went clearly to US Treasuries which made some advance, amid some cautiousness ahead of the FOMC meeting and the US/UK GDP reports (Q2). Of course, the Bund had to cope with key resistance at 154.24 that proved a hurdle too high to take out. Technically speaking, the Bund even set a doji, which is a trend reversal sign that needs to be confirmed today. In a daily perspective, the German yield curve stabilized, while the US curve was bowed with the belly outperforming. The 2‐yr yield fell by 2 bps, the 5‐yr by 5.6 bps and the 30‐yr yield by 3 bps.

Commodities crashed lower once the European trading got going and Asian Chinese equity markets tumbled. Copper, gold and oil all set new lows. In this context, it was already a surprise the Bund traded sideways in the first couple of hours. EMU data (IFO/M3) were ignored. Around mid‐morning, the Bund rallied at last about 30 ticks to near the 154.24 resistance, but the move lacked conviction and erosion kicked in, erasing all meagre gains. US Treasuries did clearly better in the risk off. Leaked dovish Fed staff forecasts (June meeting) were a mild positive for US Treasuries, but were also unable to really light the fire. Capital investment shipments excl. aircraft caught the attention as it fell for a second month in a row, suggesting that investment won’t contribute much to Q2 GDP. At that point, US Treasuries got an additional push in the back. Profit taking kicked in later on, but by the end of the session, Treasuries stood again near intraday highs, maybe as investors thought the weak investment and the rout in Chinese equities and commodities could have an impact on Fed policy. The correlation between Bund and US T‐Note was again very weak.

Well-filled US eco calendar, as FOMC meeting starts

In June, US Conference Board’s consumer confidence rebounded from 94.6 to 101.4, close to the post‐crisis highs seen at the start of the year. For July, the consensus is looking for a limited setback to 100. We believe that the risks are for a lower outcome following weaker than expected labour market data and as also other consumer confidence indicators weakened recently. The Richmond Fed index rebounded over the last few months, from ‐8 in March to 6 in June.
For July, a further limited increase to 7 is expected. Earlier released regional indicators showed a mixed picture. We believe however that the risks are for a weaker outcome following the significant rebound.

Dutch auction: hampered by holiday conditions?

The Dutch debt agency taps the on the run 5‐yr DSL (0.25% Jan2020) for €1.5‐ 2.5B. The bond trades very stable in ASW‐spread terms going into the auction. Demand could be somewhat lower than usual given holiday‐thinned circumstances, but that shouldn’t be problematic as the Netherlands already raised around 65% of this year’s funding need. The Italian treasury taps the on the run inflation‐linked 15‐yr BTP€I (3.1% Sep2026). On Thursday, Italy holds more important 5‐yr and 10‐yr BTP auctions. This week’s supply will be supported by redemptions from Spain (€19.57B) and Italy (€23.97B). In the US, the Treasury starts its end‐of‐month refinancing operation with a $26B 2‐yr Note auction. Currently, the WI is trading around 0.685%.

Today: Time to short the Bund?!

Overnight, Asian equity markets trade mixed. Chinese stocks opened significantly lower. Intraday, they dropped by more than 6%; but eventually managed to recover most losses. Nevertheless, volatility remains high and the situation precarious. The US Note future trades lower.

Today, the eco calendar contains US consumer confidence and Richmond Fed Index. Risks are on the downside of expectations which in theory in a positive for US Treasuries. This week’s supply is a minor negative. However, with the FOMC meeting looming the market reaction could be very limited. We don’t expect a policy change, but will we already get a verbal hint for a September rate hike? Unlikely, but if we would, it will weigh on the US curve with the front‐end underperforming. We hold our sell‐on‐up ticks approach for the US Note future around the recent highs (127‐23) based on our own September rate hike bet.

We’ve entered Summer trading with low volumes and technically‐inspired, sentiment‐driven trading. Last week, risk sentiment (via the earnings season) on equity markets and especially evolutions on commodity markets (lower oil/commodities supports bonds) triggered bull flattening of the German yield curve. Yesterday, these markets remained under severe pressure but the Bund didn’t really profit anymore with a failed test of the high. Technically, a potential doji could be a trend‐reversal signal. If the signal is confirmed, we’d prefer to short the Bund around current levels for return action towards the lower bound of range.