US 10yr/3m at lowest level since global financial crisis

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Global core bonds edged higher yesterday with US Treasuries outperforming German Bunds. Risk sentiment was fragile at the start of the day with EU investors still digesting EU election results and the renewed EU-Italy fiscal tensions. The ongoing trade spat between the US and China continues to weigh on sentiment as well, as hopes of an agreement fade by the day. Better-thanexpected confidence indicators in both the EU and the US provided no solace. Investors continue to flee to safe havens, further supporting core bonds. The German yield curve was mixed with yield changes varying between -1.7 bps (10-yr) to +0.5 bps (2-yr). The US yield curve edged lower with losses up to -5.4 bps (10-yr). Peripheral spreads remained rather stable, with Greece (+5 bps) underperforming. The ongoing rally in US Treasuries pushed the 10yr/3m spread to 10 bps, surpassing this year's low to levels not seen since the start of the financial crisis. Historically, an inverted curve has been a signal of a looming recession.

Asian equity markets are largely trading with losses overnight as the US-Sino trade tensions heat up again. Beijing yesterday announced it is gearing up to use its dominance of rare earths as a countermeasure in the trade spat with Washington, while the US Treasury Department refrained from labelling China a currency manipulator in its semi-annual foreign-exchange report. It did, however, change the criteria used to evaluate countries, thereby adding Ireland, Italy, Vietnam, Singapore and Malaysia to its watchlist. China, Japan, South Korea and Germany were already on that shortlist. The ongoing market uncertainties keep investors in full risk-off, further supporting core bonds at the start of the day.

Today's eco calendar only contains secondary data in both the US (Richmond Fed manufacturing index) and the EMU. Sweden publishes its first-quarter GDP result, while the Bank of Canada holds its May policy meeting. ECB governors Mersch and Rehn speak today. The international trade story continues to dominate financial markets, with investors eyeing key eco data next week.

Long term view: markets concluded that the ECB missed out on this cycle. They start pondering the possibility of an additional deposit rate cut. The downtrend in the German 10-yr remains in place so far and is moving towards the 2016 alltime low (-0.205%). Regarding the Fed policy, markets are now largely discounting a Fed rate cut by December. The US 10-yr yield fell below the cycle low (2.34%) and successfully tested the 50%-retracement (2.28%). A confirmed break would bring the 62%-retracement level (2.06%) on the radar.

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