Uplift in sentiment weighs on core bonds

Rates

Global core bonds lost ground yesterday. After last week's risk-off modus on the EC's significant growth downgrades, risk sentiment improved again on Monday. With an empty economic calendar in both the US and EMU, global sentiment was the key driver of financial markets. The German yield curve bear steepened with changes ranging from +0.5 bps (2-yr) to +4.2 bps (30-yr). US equities performed mixed on Monday, with investors awaiting more results from both the border security discussions in Washington and the fresh round of trade negotiations in Beijing. US Treasuries tracked European bonds and edged lower. The US yield curve edged higher with changes up to +2.1 bps (5-yr). Italian BTP's moved higher again on rumours of early elections after Deputy PM Salvini's League-party polled strongly in regional elections (Abruzzo). The Italian 10-yr yield spread vs. Germany tightened (-9 bps). Meanwhile in Spain, PM Sanchez struggles to lock support for his budget plans that will come to a vote in Parliament tomorrow. He was rumoured to call an early election in April. Government officials later denied. The Spanish 10-yr yield spread vs. Germany tightened (-2 bps).

Asian stock markets gain mostly ground this morning. Japanese indices outperform as the yen weakens. The Bank of Japan announced it would cut purchases of some longer-dated bonds in an attempt to halt a decline in yields caused by the global debt rally. Risk sentiment was lifted after the US Congress reached a tentative border security deal that, if approved, might avoid another government shutdown. The deal contains $1.375bn for border fencing, less than the $5.7bn president Trump demanded and equal to border spending in recent years. Democrats, in turn, dropped their demand for a cap on detention beds for immigrants detained within the US. Furthermore, the Trump administration said president Trump still wants to meet Chinese president Xi Jinping to finalize a deal. Negotiators from both sides are currently seeking progress as trade talks continue in Beijing this week. The uplift of sentiment weighs on core bonds this morning.

Today's economic calendar is empty. Several central bankers taking stage today are wildcards (ECB's Weidmann, Bank of England chairman Carney and Fed chairman Powel). Risk sentiment will remain today's key driver as investor await progress from US-Sino trade talks and whether the preliminary border security deal finds support in Congress. The German 10-yr yield fell through the lower bound of the 0.15%-0.31%, suggesting a return to the psychological 0% mark or even to negative levels. Or will yesterday's rebound persist?

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