US non-manufacturing ISM weighs on US Treasuries

Global core bonds recovered somewhat from Friday’s beating during European trading hours, ignoring good EMU retail sales. Listless stock and volatile oil markets had no impact neither. Trading dynamics changed after the US non-manufacturing ISM. The ISM fell more than expected in December, from 60.7 to 57.6, but underlying details were strong unlike with last week’s manufacturing survey. The forward looking new orders rose to a 6-month high. The lower headline index mainly reflects an easing in supply constraints. US Treasuries started selling off after the ISM, while US stock markets (+ 0.5% to +1.25%) outperformed Asia and Europe. Dovish Atlanta Fed governor Bostic, who doesn’t vote on policy, trimmed his outlook for this year from 2 rate hikes to 1, but favours to continue running down the balance sheet. He couldn’t stop the bear flattening of the US yield curve with yields rising between 4.8 bps (2-yr) and 0.7 bps (30-yr). Worst fears that the Fed might turn to rate cuts later this year to stem an economic downturn, faded following strong ADP, payrolls and non-manufacturing ISM. Changes on the German yield curve ranged between +1 bp (30-yr) and +1.7 bps (5-yr).

10-yr yield spreads vs Germany ended nearly unchanged with Greece outperforming (-4 bps) and Belgium (+2 bps) underperforming. The Belgian debt agency announced the near term launch (probably today) of a new 10-yr syndicated benchmark deal (Jun2029). They’ll probably aim to raise €5bn, which is immediately a decent chunk of this year’s €28bn OLO funding need. The debt agency plans to do a second syndicated deal later this year with a maturity of at least 15 years. As the debt agency issued a 15‐yr (green) OLO last year, we expect them to prefer a 20‐yr deal or longer next year. On top, the debt agency already has €7.78bn outstanding in 2034, compared to no bonds maturing in 2039 (20y), 2044 (25y) or 2049 (30y).

Asian stock markets trade mixed this morning with Japan slightly outperforming. Core bonds tread water. Today’s eco calendar contains EMU EC confidence data and US NFIB small business optimism. Both are forecast to show a modest decline in December, but we don’t expect them to influence trading. Heavy supply might weigh on bonds with the US, Germany, Austria and the Netherlands joining the Belgian deal. Risk sentiment remains a wildcard for trading. Technically, the German 10-yr yield bounced off 0.15% support last week. That’s the final hurdle before returning to (sub)-zero levels. The US 10-yr yield lost the 2.75%-2.8% area by the end of last year, opening the path for a technical decline towards 2.5%. We approached this level last week. In both Germany and the US, we think that sufficient bad news is discounted at current levels. Policy normalization expectations in the US and EMU have become extremely/too dovish.

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