Wary of next week's Trump speech?

Rates

Core bonds rally, as Mnuchin downplays expectations

Global core bonds rallied during yesterday's US session on comments by Mnuchin. The US Treasury secretary downplayed the "phenomenal" tax plans and brought no details of fiscal policy. Mnuchin said that they want to pass ambitious tax reforms plans by August and hoped that US growth would accelerate towards 3% by late 2018. The short end of the US Treasury curve outperformed. Mnuchin added that they were contemplating to issue very long US bonds (eg tenor 50-yr or 100-yr).

In a daily perspective, US yields fell between 1.5 bps (2-yr) and 4.6 bps (5-yr), the belly outperforming. The US Note future closes in on the 125-09+/16 resistance area. The German yield curve bull flattened with yields 2.7 bps (2-yr) to 7.3 bps (30-yr) lower. Technically, the Bund took out 165.48 resistance (62% retracement). On intra EMU-bond markets, 10-yr peripheral yield spread changes versus German widened up to 4/5 bps with Italy (Monday auction) and Greece (+8 bps) underperforming. The German-French 2-yr yield spread remained high (43 bps), but due to a stronger decline of the German 2-yr-yield than the French one (which also declined), as French election fears eased.

 

Thin eco calendar, no central bank speakers or events

The eco calendar remains thin and rather uneventful at the end of the trading week. In the euro area, there are only some second tier national releases like the February French consumer confidence (stabilization), Italian December new orders and manufacturing confidence (104.6 versus 104.8) and Spanish PPI for January. In the US, the January new home sales are expected to be up 6.4% (571K) after a 10.4% (536K) decline in December. The monthly figures are volatile. In general, housing is still doing fine, but following steep increases the trend looks to be flattening. However, on a monthly basis we side with the market expectation of a rebound. The final Michigan consumer sentiment index is expected to be marginally higher at 96 compared to the preliminary figure, even as it is off the cycle highs at 98.5. It remain near the highs of the post-recession era. All in all, we don't expect the US figures to affect markets in a strong directional way.

 

Plain vanilla 7-yr Note auction

The US Treasury ended its end-of-month refinancing operation with a plain vanilla $28 7-yr Note auction. The auction stopped very close to the 1:00 PM bid side with a near average bid cover (2.49). Bidding details showed average indirect and dealer bids while the direct bid slightly disappointed. The auction followed a strong 2-yr Note, a mixed 2-yr FRN and a little disappointing 5-yr Note auction.

 

Wary of next week's Trump speech?

Overnight, most Asian stock markets correct around 0.5% lower. The US Note future remains near yesterday's closing levels and approaches 125-09/16+ resistance. Brent crude stabilizes around $56.5/barrel.

Today's eco calendar only contains second tier eco data, suggesting that core bond trading will remain sentiment-driven and technical in nature. End-of-month extension buying could come into play. The Bund broke above 164.90 & 165.48 resistance levels, suggesting full retracement if the break is confirmed by a drop of the German 10-yr yield below 0.17/20% support (currently 0.23%). Yesterday's US Treasury Secretary Mnuchin's comments made some investors wary of next week's Trump speech. Will the US president be able to deliver his fiscal promised fiscal stimulus plans? The US Note future might be gearing up for a new test of 125-09/16+ resistance, especially if equity markets correct lower after the recent record run.

On EMU bond markets, recent developments suggest that the impact of Greek/French worries could diminish short term.

 

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