US 10y yield ready to test 3% mark?!

Global core bonds extended losses yesterday with US Treasuries this time underperforming German Bunds. Initial weakness in the Bund mirrored Monday's action as BTP's continued rallying in the first trading hour. Eco data printed stronger-than-expected on both sides of the Atlantic (German ZEW & US NFIB Small Business Optimism). We can't attach a specific move to the releases, but they probably weighed on core bond sentiment in general. US Treasuries ceded more ground ahead of the start of the US Treasury's mid-month refinancing operation. Brent crude's rally from $77.5/barrel to $79.5/barrel played as well. US yields increased by 3.3 bps (2-yr) to 5 bps (7-yr) with the belly of curve underperforming the wings. The US 10-yr yield is narrowing in at the psychological 3% mark, which is first resistance. German yields added 0.7 bps (2-yr) to 2.9 bps (10-yr). The German 10-yr yield surpassed the mid-way point of its 0.3%/0.5%. 10-yr yield spread changes vs Germany barely changed with Greece outperforming.

Asian stock markets remain fragile this morning despite robustness of Wall Street yesterday evening. The US Note future and JPY are a tad higher, but we expect a neutral opening for the Bund.

Today's eco calendar contains (outdated) EMU industrial production figures (July) and US August PPI data. More indications of rising price pressures could weigh on US Treasuries. Adding supply operation today & tomorrow (10y-30y) and a speech by Fed's Brainard could cause a test of the 3% mark (US 10y yield) today. Brainard embraced sustaining strong labor market conditions and inflation around target. They warrant continued gradual rate hikes. From a modestly accommodative policy to a neutral one and afterwards toward modestly beyond neutral. US Treasuries could in this context further underperform vs German Bunds especially as the rally in Italian BTP's (which hurt Bunds) seems to be slowing. Tomorrow's ECB meeting will probably be low key after the June policy decisions. The ECB handed itself little room to manoeuvre until next Summer, but president Draghi could further stress early signs that inflation will pick up towards the ECB's goal. Hurricane Florence is about to hit the US Southeast coast on Thursday or Friday and might get more and more attention as well.

Technically, both the German 10-yr yield and the US 10-yr yield moved in the upper part of their sideways trading ranges, respectively between 0.3% and 0.5% and between 2.8% and 3%.

Download The Full Sunrise Market Commentary