US durables and EMU economic sentiment main data

Rates

Core bonds profit from "risk-off" and other factors

On Friday, the global core bond rally continued unabatedly with US yields 4 to 6.1 bps lower and German yields 3.7 to 6.6 bps lower. In both cases, the curves bull flattened. The rally lasted from start to finish. A European equity correction supported the initial rise, but also when equities rebounded, bonds continued their march higher. The "usual" correlation between equities and core bonds is currently very weak. US equities are at record highs, while the US 10-yr yield shed 20 bps in the past 6 sessions. Technical short covering and early month-end extension buying probably added to Friday's gains.

From a technical point of view, both the Bund and the T-Note future broke through key resistances. The 10-yr US and German yields are testing key yield support at respectively 2.29/2.31% and 0.17/0.20%. Breaks would paint triple tops on the charts suggesting that a further decline is possible/likely. At the short end, the German 2-yr yield is falling off a cliff and currently traded at -0.95%, partly on PSPP-related buying and collateral shortage. The US 2-yr yield decline is still modest and technically irrelevant even as 1.13% yield support looms. The US 2-yr yield dropped about 10 bps in the past three days, but the probability of a March rate hike has neverthelles risen to 40% from 34%. Core bonds outperformed swaps in past days suggesting that the safe haven motive linked to a busy European election calendar is in play. That's in line with yen strength versus dollar and an upward bias in the gold price, but in contradiction with recent strong eco and inflation data. However, that's not visible in US equities and despite yesterday weakness neither really yet in European equities , nor in past days in peripheral bonds.

On intra EMU-bond markets, 10-yr yield spread changes versus Germany narrowed for non-German core bonds and France, while widening marginally for Italy (2bps) and Spain (6 bps).

 

US durables and EMU economic sentiment main data

Consensus expects a sixth straight rise in EC economic sentiment in February (108.1 from 107.9). Given the strength of the PMI, with which there is a good correlation, risks might be on the upside of consensus, but a caveat needs to be taken into consideration: consumer confidence, which accounts for 20% of the overall figure, has already been released and declined to -6.2 versus -4.8 in January. January US durable orders should rebound strongly after a 0.5% M/M drop in December, but it should be largely the result of very strong (but volatile)aircraft orders (Boeing). Core orders that exclude transportation are expected to be up 0.5% M/M. They improved steadily in H2 of 2016, but can they stick to that pace? Neither indicator is a strong market mover.

 

Italian BTP auction: pricing cheap enough to offset risks?

The Italian debt agency launches a new 5-yr BTP (€3.5-4B 1.2% Apr2022) and taps the off the run BTP (€0.5-1B 1.6% Jun2026) and on the run 10-yr BTP (€1.5-2B 2.2% Jun2027). Grey trading suggests that the new 5-yr BTP will be priced with an impressive 18.4 bps pick-up in ASW spread terms compared to the previous 5-yr benchmark (0.35% Nov2021). That corresponds with a 21 bps pick-up in yield terms. The other two BTP's on offer cheapened in the run-up to the auction and trade normal on the Italian curve. We expect a plain vanilla auction with market participants weighing the cheap pricing against jitters in the Italian financial sector and the scattered political scene. Apart from the regular BTP's, the treasury also taps two floating rate CCTeu's (Dec2022 & Feb2024) for a combined €2.5-3B. Later this week, Germany, Spain and France tap the market.

 

Red alert for US and German 10-yr yields

Overnight, most Asian stock markets correct lower with Japan underperforming (-1%). The US Note future has a tiny downward bias and Brent crude gains ground. However, we still expect a neutral Bund opening.

Today's eco calendar contains EMU economic confidence and US durable goods orders. Risks are on the upside of expectations, but the negative impact on core bonds will probably be minor given current sentiment. The US 10-yr yield approaches key 2.3% support after US Treasury Secretary Mnuchin's comments made some investors wary of Trump's speech (Tuesday night). Will the US president be able to deliver his promised fiscal stimulus plans? Fiscally dovish comments will be necessary to avoid a sustained break below 2.3%. The German 10-yr yield reached similar support around 0.17%. Sentiment on stock markets and EMU bond markets could be crucial to decide on the test. Equity markets are prone for correction (eg last Friday) while tensions on EMU bond markets are easing following the outcome of last week's Eurogroup meeting on Greece and as French election polls suggest stronger support for Macron. We won't fight the current trend on German yield markets as collateral scarcity and other technical factors might be at play as well and interfere with positive underlying growth and inflation dynamics.

 

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