US yields hit important resistance levels

KBC Market Research Desk KBC Bank

US yields hit important resistance levels

The US Note future's underperformance against the German Bund continued yesterday. The move was mainly an extension of Wednesday's sell off, when the Fed's Beige Book and Apple's US investment announcement revived the reflation trade. ECB governors' warnings about euro strength dampened speculation on changes to the ECB's communication strategy at next week's ECB meeting and played a role on the European side of the story. The US 5-yr and 10-yr yields tested key resistance, respectively at 2.42% (2011 top) and 2.63%/2.64% (2016/2017 top), but a break didn't occur. The US House passed a stopgap funding bill to avert a government shutdown this weekend, but Senators are still bickering. An agreement could be sufficient to push yields above those key levels after the weekend.

The US yield curve bear steepened in a daily perspective with yields up to 4.6 bps (30-yr) higher. The German yield curve steepened as well with yield changes ranging between -1.1 bp (2-yr) and +2.2 bps (30-yr). 10-yr yield spread changes versus Germany ranged between +2 bps and -2 bps.

Most Asian stock markets eke out some gains overnight despite yesterday's slightly negative close on WS. The US Note future hovers near the sell-off lows and Brent crude shows early signs of topping off. We expect a neutral opening for the Bund. Today's eco calendar contains Michigan consumer confidence and speeches by Fed Bostic (economy) and Quarles (regulation). Bostic votes on policy this year and said earlier this year that he is in favour of 2 or 3 rate hikes. Ahead of tonight's US Senate vote on a stopgap spending bill, we don't expect US yields to break through resistance levels. In case of an agreement, we prepare for such move after the weekend. In case of a government shutdown spells, which is not our base scenario this time, US Treasuries tended to profit from safe haven flows.

Technical considerations remain at play for the Bund as well. German yields are close to resistance levels, respectively at -0.55% (2-yr), -0.06% (5-yr), 0.62% (10-yr) and 1.38% (30-yr), but a break higher is unlikely ahead of this weekend's SPD convention and next week's ECB meeting. We argue in favor of some consolidation near the highs (in yield terms). Medium term, we closely follow German trade union negotiations about pay rises. German wages are expected to be pivotal to start an upward spiral in EMU price dynamics and could be a bearish signal for Bunds. Strong global growth, rising inflation expectations and the global push to monetary normalization are bearish factors for bonds medium term.

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