US Treasury will start selling 20-yr bonds

Rates

Core bonds traded with a gentle positive bias until the early US eco data releases. December US retail sales, January Philly Fed Business Outlook (leading indicator for manufacturing ISM?!) and weekly jobless claims all printed significant positive surprises. Core bonds lost ground with US Treasuries underperforming German Bunds. Losses could have been bigger though especially given WS's umpteenth rally (+1%). US yields added between 1.2 bps (2-yr) and 2.6 bps (10-yr) on a daily basis. German yields fell up to 1.9 bps (10-yr). Peripheral yield spreads vs Germany widened by around 3 bps with Italy (+6 bps) underperforming, probably as a consequence of digesting this week's heavy sovereign bond supply (syndicated deals in Spain, Italy and Belgium).

Most Asian stock markets record gains this morning though sentiment is less ebullient than on WS yesterday. Chinese eco data (including Q4 GDP) printed near consensus. The US yield curve bear steepens slightly after the US Treasury announced it plans to issue 20-yr bonds on a regular basis starting somewhere in H1 2020. More details (timing, amount, at which tenors issuance will be reduced,...) will follow on February 5.

Today's US eco calendar contains December housing data (building permits/housing starts), industrial production and January Michigan consumer confidence. December data (especially production) can still suffer from weakness indicated by other US indicators while we hope to see more green shoots in the January figures. Numbers released today aren't the big market movers though. Revisions to the final EMU inflation data seem unlikely. Q4 earnings and a speech by Fed Harker are wildcards. Overall, we thus expect today's session to be sentiment and technically driven. Yesterday's decent performance despite rallying stocks and thriving eco data suggests that core bond momentum is improving again.

Technically: core bond yield's Q4 upleg was interrupted at the start of the year because of the US-Iran conflict. Geopolitical tensions in the Middle East again proved to have a limited shelf date as market theme. Inflation risk premia remain underpriced at current yield levels and could grab market attention with eg inflation expectations bottoming out. The German 10-yr yield tested -0.18% (July high)/-0.15% (38% retracement of Feb '18 – Sep '19 decline) resistance, but a break didn't occur (yet). The US 10-yr yield on multiple occasions failed to take out the 1.94% upper bound of the reigning trading channel.

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