Core bonds lost tremendous ground yesterday. Both the German Bund and US Note future slid from start to finish. Yesterday's main and only story featured a tariff rollback between the US and China if the phase one trade deal is completed. The first comments came from a Chinese ministry of Commerce spokesman, but White House economic advisor Kudlow later confirmed the advance: "If there's a phase one trade deal, there are going to be tariff agreements and concessions". The more hawkish trade officials in Washington still sound more guarded, but they seem to be a minority. Investors embrace the progress and expect the deal to be signed upon before the end of the year. US stock markets rallied to fresh all-time records, with European indices also recording multiyear highs. The German yield curve bear steepened with yields rising by 2.6 bps (2-yr) to 10.8 bps (30-yr). Changes on the US yield curve ranged between +6 bps (2-yr) and +9.9 bps (5-yr). The US 10-yr yield tested 1.94% resistance, but a break higher didn't occur. The US $19bn 30-yr Bond auction tailed somewhat, but overall demand was in line with average. 10-yr yield spread changes vs Germany ended close to unchanged with Greece (-5 bps) outperforming and Italy (+6 bps) underperforming. Asian stock markets cede slightly ground this morning with Japan outperforming (+0.25%). Core bonds trade slightly off yesterday's intraday sell-off lows. Overnight news flow remains extremely thin. Today's eco calendar remains confined to November University of Michigan consumer confidence. Consensus expects a stabilization at 95.5, but we don't expect the outcome to be crucial for trading. Risk sentiment on stock markets remains key. Main US/European indices since mid-October started frontrunning on less geopolitical uncertainty (Brexit & US-Chinese trade talks). On the one hand, quite some good news is already discounted. On the other hand, we don't see big reasons to be overly cautious. The US and China can still bring additional good news, by means of a date and location for signing off on their phase 1 trade deal. The long weekend ahead in the US (Veterans' Day) might cause some to take chips off the table, but we wouldn't buy into any core bond comeback at this stage.
Technically, the German 10-yr yield and US 10-yr yield both rebounded away from August lows following ECB/Fed September policy meetings. The German 10-yr yield broke above -0.41% resistance, improving the technical picture. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the 1.43%-1.94% sideways trading channel. The upper bound is within reach.
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