US 10-yr yield tests 1.94% resistance
Core bonds sold off yesterday. The move started during ECB Lagarde's first Q&A session with the press following the central bank's policy meeting, but all credit was due to... US President Trump. He tweeted "Getting VERY close to a BIG DEAL with China. They want it, and so do we!". The message triggered a risk rally and pulled core bonds lower. Especially, the second part, indicating that the US wanted a deal, grabbed attention. Washington officials later suggested that a phase one trade deal would be announced today. US stock markets rallied around 0.75% to fresh all-time highs. US yields added 4.4 bps (2-yr) to 10 bps (10-yr) in a daily perspective. The German yield curve bear steepened with yields rising by 1.3 bps (2-yr) to 5.4 bps (30-yr). 10-yr yield spread changes vs Germany narrowed slightly with Greece outperforming (-7 bps).
Briefly returning to that ECB meeting: The ECB signaled slightly reduced risks to the economic outlook, lessening the likelihood that a further easing might be required while the persistence of subdued growth and inflation in its new projections would suggest policy tightening wouldn't be warranted for the foreseeable future. In addition, the indication that a strategic review of ECB policy is expected to take until the end of next year provided an additional rationale for the ECB to avoid any early alteration in current policy settings.
Asian stock markets rally significantly this morning with China and Japan outperforming. The German Bund and US Note future follow UK Gilts lower after Boris Johnson's landslide election victory (see below). A Chinese state company's dollar bond default gets little attention, but is something to keep in mind longer term. Today's eco calendar contains US November retail sales. Risks are tilted to the upside of expectations (record Thanksgiving sales), adding to the global context (US-China trade deal, UK elections, risk rally) which is a negative one for core bonds. Strong retail sales would add evidence that the US consumer remains the backbone of the economy.
The German 10-yr yield in October 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 upper half of the 1.43%-1.94% sideways trading channel. Recent development trigger a fresh test of the upper bound resistance levels.
Author
KBC Market Research Desk
KBC Bank
