US Treasury market ready to absorb supply?

US Treasuries and German Bunds had a similar intraday trading pattern. They lost some ground in the early stages of European trading, but turned north during the US session. Moves were technically insignificant and we didn’t find a real driver. The correlation with Italian markets or stock markets was absent yesterday and even the other way around with Italian BTP futures and main equity indices following the same intraday journey as Bunds (first lower, than recovering). That’s rather strange from a risk point of view. The US yield curve bull flattened with yields up to 3.6 bps lower (30-yr). Intraday US yield changes take into account Monday’s absence (Columbus Day). German yields increased by 0.8 bps (30-yr) to 2 bps (10-yr) with the belly of the curve underperforming the wings. 10-yr yield spread changes vs Germany ended broadly unchanged with Italy (-11 bps) and Greece (-8 bps) outperforming.

Asian stock markets are mixed overnight with Korea underperforming, returning from a national holiday. The US Note future treads water in a very tight range despite an avalanche of headlines (see above). We expect a neutral opening for the Bund as well.

Today’s eco calendar contains US PPI data. Markets are rather sensitive to pride developments these days. Consensus expects a 0.2% M/M and 2.7% Y/Y increase. The US Treasury starts its mid-month refinancing operation with a $36bn 3-yr Note auction and a $23bn 10-yr Note auction. US Treasuries could lose some ground in the run-up to the auction. It will be interesting to see how strong demand is. Are buyers already interested following the latest increase in yields or do they expect the upleg to continue and stay sidelined for a while? We’d still shun BTP’s despite yesterday’s intraday rebound. The parliamentary budget watchdog indicated that next year’s growth forecast (1.5%) is several points too high, suggesting that the 2.4% deficit target is unrealistic. The watchdog has no blocking powers, but hands more ammo to the EU which is also at odds with the Italian proposals. Tomorrow’s BTP auctions are an important gauge for appetite. Technical pictures of European equity markets remain heavy, lining up for a test of key support as we approach the start of Q3 earnings season. The Bund’s performance so far this week has been rather disappointing given these risk factors. From a technical point of view, the US 10-yr yield broke key resistance earlier this month, suggesting more upward potential medium term. Next resistance levels are 3.32% and 3.79% (50% and 62% retracement from 2007-2016 decline).

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