Traditional correlations remain very loose

KBC Market Research Desk KBC Bank

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Global core bonds ended near opening levels yesterday. US Treasuries slightly underperformed German Bunds. Core bonds' performance was again rather strong given the bullish outlook of Fed Chair Powell in his semi-annual testimony before US Congress, the rebound in stock markets and the stabilization of Brent crude. The US S&P 500 cleared final resistance (2800) before the all-time high (2872). Changes on the German yields declined by 0.2 bps (2-yr) to 1.8 bps (10-yr). US yields added 2 bps (2-yr) to 0.2 bps (10-yr). The US 2-yr yield closed above 2.6% for the first time since 2008. 10-yr yield spread changes vs Germany ended close to unchanged with Portugal (-3 bps) and Italy (- 9 bps) outperforming.

Asian stock markets rebound in line with WS this morning with Korea slightly underperforming. USD/JPY extends its upward trend and the US Note future is a tad lower. We expect positive risk sentiment at the start of European dealings, with a marginally lower opening for the Bund.

Today's eco calendar contains only second tier eco data with US housing starts and building permits. Morgan Stanley, Alcoa and eBay are amongst companies to publish earnings. They're unlikely to break the positive vibe on stock markets. Powell appears for the housing panel in US Congress and will repeat yesterday's message. The US economy is in a very good place. Fiscal stimulus could be a tail wind for another 2 to 3 years and warrants a continuation of the gradual tightening cycle. We expect rate hikes in September and December (market implied probability: 68%). Powell didn't really emphasize downside risks coming from the trade war, which could be more visible though in tonight's Beige Book via eg delays in business investments. We expect the market impact on core bonds to remain muted. Both the Bund and the US Note future trade in very narrow sideways ranges. Traded volumes are low, reflecting Summer conditions. Traditional correlations with other markets (eg risk paradigm) are rather loose. Eco/event/other news is easily shrugged off as well these days.

Technically, the German 10-yr yield tested support just below 0.3%. A break didn't occur, suggesting room to move higher in the 0.3%-0.5% range. The US 10-yr yield hovers near the middle of the sideways range between 2.71% and 3.12%.

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KBC Market Research Desk

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