Core bonds under pressure in US session

Rates

Global core bonds had a very quiet European session devoid of economic news. Initial gains due to a mild risk-off sentiment in Asia were safeguarded. During the US session, US Treasuries came under some downward pressure ahead of the US 30-yr Note auction (see below) and the FOMC minutes. US Treasuries made a knee-jerk reaction (higher), before closing near pre-FOMC levels. Equities rallied higher though, with S&P taking out first key resistance. In a daily perspective, given the higher opening, the German curve shifted marginally lower with yield changes limited to slightly more than 1 bp. In the US, the curve bear steepened with yields 0.8 bps (2-yr) to 4.5 bps (30-yr) higher.

Today, the eco-calendar is fairly empty with only the French and Italian production data (of secondary) interest . The IMF meetings may bring some headlines as both central bankers and other policymakers will attend.

FOMC afraid to cross the Rubicon

The FOMC Minutes got quite some attention. Fed governors felt pretty good about economic developments. Unemployment drops faster than expected and underutilization of labour diminished further (some even believe it’s gone).
Consumer spending picks up and housing activity is encouraging. Almost all participants remained reasonable confident that inflation would go up towards target. Why didn’t the FOMC start normalizing policy in this context? According to the Minutes, uncertainty about developments abroad and the impact on the US economy (via risks for stronger dollar, less exports) was the main reason.
Risks to the outlook remain nearly balanced, but the Committee wants to be prudent and wait for additional information before raising the FF rate. Many participants said the improvement in labour market conditions met or would meet soon one of the conditions for normalization. “But some indicated that their confidence that inflation would gradually return to target had not increased.” Most participants agreed that their confidence that inflation would move to the target would increase as labour market conditions improved. Many expected those conditions to be met later this year although several members were concerned about downside risks to the outlook for real activity and inflation.

Summarizing, the Committee decided to hold off a lift-off because of risks to economic and inflation outlook stemming from developments abroad. Given recent developments, conditions for a rate hike are not fulfilled for the October meeting and likely not for the December meeting either.

Solid 30-yr Bond auction

The US Treasury concluded its end-of-month refinancing operation with a solid $13B 30-yr Bond auction. The auction stopped a little through the 1:00 PM bid side and the bid cover was well above average. Buy side demand was very good overall. The auction followed a plain vanilla 3-yr Note auction on Tuesday and a strong 10-yr Note auction yesterday.

Today: Atlanta Fed Lockhart wildcard

Overnight, Asian stocks markets trade up to 2% higher following the recovery on commodity markets. Soft FOMC Minutes triggered a late session rally on WS. The US Note future spiked temporary higher, but rapidly erased gains in a risk-on environment. Overnight, the T-Note trades sideways.

Today’s eco calendar is empty apart from two Fed speakers. Both Chicago Fed Evans and Atlanta Fed Lockhart are currently voting members. Evans is outspoken dovish and will argue to put off the lift-off to 2016. Lockhart is more of a centrist governor. His comments could have most market impact. If he sticks with a 2015 rate hike, that’s a negative for US Treasuries. It would put the telly on voting governors in favour of a rapid hike at 3 (Lacker, Williams). Ahead of Lockhart’s speech, risk sentiment and commodity markets are the key trading themes. Overnight strength suggests some minor weakness, though in the US it could be offset by the long weekend (Columbus Day on Monday) and the end of the refinancing operation.

After the dovish September FOMC meeting, we eyed a return to the contract high for the US Note future (129-10+), but we didn’t anticipate a break higher. That last assumption was under severe pressure after disappointing payrolls, but ultimately both the US Note future and the Bund are back in the ranges. We prefer to install a cautious sell-on-upticks approach around current levels for return action to the lower bound of the established ranges.

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