US Treasuries sell-off on higher US CPI

KBC Market Research Desk KBC Bank

Core bonds whipsawed around opening levels until the release of US eco data. Both headline (0.5% M/M & 2.1% Y/Y) and core CPI (0.3% M/M & 1.8% Y/Y) beat consensus and trumped disappointing retail sales (-0.3% M/M). The core bond sell-off regained vigor following a three trading days pause with US Treasuries underperforming German Bunds. Traditional market correlations remain loose with the dollar selling off and US stocks gaining more than 1%.

US yields shifted 5.1 bps (30-yr) to 9 bps (5-yr) higher with the belly of the curve underperforming the wings and new cycle highs for tenors up to 10-year. The German yield curve bear steepened with daily changes ranging between +0.6 bps (2-yr) and +1.8 bps (30-yr). 10-yr yield spread changes vs Germany ended narrowly mixed with Greece underperforming (+8 bps), and Portugal (-6 bps) & Italy (-3 bps) outperforming.

The US Note future continues trading near yesterday’s sell-off low with Asian markets (who aren’t closed for Lunar NY) copying WS gains. Brent crude returned above $65/barrel. We expect a weaker opening for the Bund.

Today’s eco calendar heats up in the US with several releases (empire manufacturing, PPI, Philly Fed business outlook, industrial production, weekly claims). Yesterday’s new selling bout suggests that core bonds markets don’t need much good news to cede more ground. Especially as the US 10-yr yield (>2.9%) is now within reach of key resistance (3.05%; 2014 high) and as oil and stock markets gain momentum. We expect more losses for the US Note future and the Bund.

Strong growth momentum, rising inflation (expectations) and the global turn towards monetary policy normalization are structurally negative factors for core bonds medium term. US and German yields cleared resistance levels earlier this year and moved towards next targets. The trading band for the US 10-yr yield is 2.64%-3.05%. The German 10-yr yield’s trading band is 0.62%-1.06%. Correction towards the lower bounds could be used to put up short positions in the Bund and the US Note future.

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KBC Market Research Desk

KBC Bank

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