Fed in no hurry to raise rates: Treasuries rally

Rates

Yesterday, global core bonds traded listless in the run up to FOMC meeting. US Treasuries outperformed German Bunds slightly. The eco calendar was empty apart from EMU M3 money supply data, which were in line with expectations. Equity markets had a constructive trading session, while Brent crude temporary moved above $47/barrel, a new cycle high. The FOMC meeting was more dovish than expected with no clear hint that rates would be raised in June. (cf. below). US Treasuries rallied on the decision. In a daily perspective, the US curve shifted lower by 4.4 (2‐yr) to 7.6 bps (10‐yr). The German yield curve traded 0.2 bps (2‐yr) to 1.3 bps (10‐yr) lower with the very long end of the curve underperforming (+2.6 bps). The Kingdom of Belgium’s announcement of two syndicated deals in the near future (OLO 79 Oct2023 & OLO 80 Jun2066) and the German 30‐year Bund auction weighed on that part of the curve. On intra‐EMU bond markets, 10‐yr yield spread changes versus Germany narrow up to 5 bps (Portugal).

US Q1 GDP growth and German inflation eye-catchers

US economic growth is expected to have slowed further in Q1. The consensus is looking for an annualized growth figure of 0.6% Q/Q, less than half the pace of growth seen at the end of last year. While personal consumption is expected to remain the main growth driver, a slowdown is forecast. Besides consumption, also residential investments and government expenditures probably contributed to growth, while net exports, non‐residential investments and inventories probably acted as a drag on growth. We believe that the risks are for a downward surprise, indicating that growth was close to zero during Q1. In Germany, inflation is expected to have slowed again in April following an uptick in March. The consensus is looking for a slowdown from 0.1% Y/Y to 0.0% Y/Y, but we see risks for a downward surprise due to the early timing of Easter. Energy prices might however support headline inflation. Finally, in the euro area, Economic confidence is expected to have picked up slightly in April, from 103.0 to 103.4, following three consecutive monthly declines. Recent survey data showed a mixed picture and therefore we continue to see downside risks for the Commission’s confidence indicators too. US jobless claims and German unemployment data will only be of second‐tier importance.

The FOMC wasn’t ready to give markets already more guidance about an eventual rate hike at the June meeting. The FOMC dropped the reference to global & financial risks posing risks for the US, but will continue to monitor inflation and global and financial developments.

New Belgian syndications: 7-yr and 50-yr!

The Kingdom of Belgium announced its intention yesterday to launch a new 7‐ yr OLO 79 (Oct2023) and 50‐yr OLO 80 (Jun2066). The syndicated deals are expected to take place today. Concerning the pricing of the new OLO 79 on the Belgian yield curve, we interpolate asset swap spreads between OLO 68 (2.25% Jun2023) and OLO 72 (2.6% Jun2024). The interpolation corresponds with an asset swap spread of minus 15 basis points, including a small new issue premium. For the pricing of OLO 80, we compare 30‐yr Belgian and French bonds. Belgian OLO’s trade around 10 bps more expensive than French ones at that part of the curve. France already has a 50‐yr OAT outstanding which currently trades around 79 above swap. Taking into account the spread at the 30‐yr tenor and a new issue premium, suggest that the bond will be priced to yield around MS + 100 bps. The Italian treasury launches a new 7‐yr floating rate CCTeu (€2.5‐3B Jul2023) and also taps the on the run 5‐yr BTP (€1.75‐2.25B 0.45% Jun2021) and 10‐yr BTP (€2‐2.5B 1.6% Jun2026). We expect plain vanilla demand at best, but investors should still be able to digest the relatively low amounts on offer.

Neutral Fed so sell the uptick?

Overnight, most Asian equity markets trade lower with Japan underperforming on the back of a stronger yen, as the BoJ kept policy unchanged. The JGB curve shifts lower at the 10‐to 30‐yr sector by 2.7 to 3.4 bps. The US Note future gains more ground after yesterday evening’s uneventful FOMC meeting and today’s BOJ decision to stand put. We expect a somewhat stronger opening of the Bund as well. Brent crude continues to trade near the cycle high around $47/barrel.

Today’s eco calendar heats up with EMU EC consumer confidence, German CPI and Q1 US GDP. Risks are on the downside of expectations, which is a positive for bonds. In light of the outcome of the Fed meeting, it will be interesting to see whether core bonds are able to eke out gains today.
Sentiment versus the Bund and the US Note future soured over the past days. We believe that any corrective action will remain short‐lived and hold on to our sell‐on‐upticks approach.

Technically, we would short US Treasuries and aim for return action lower (support at 128‐01+) as US markets remain too dovish positioned. We also hold on to our sell‐on‐upticks approach in the Bund. The drop below 163.16 suggests return action to the March low (160.81). In yield terms, the German 10‐yr yield could advance further towards 0.33%. We “fear” that the ECB has no (or limited) tools left to ease policy further and a sudden correction like this time around last year could be around the corner.

•  Download Full Sunrise Market Commentary