Risk aversion to dominate trading today?

Global core bonds ended mixed yesterday with US Treasuries underperforming German Bunds. The Bund mirrored moves in the BTP future amid an empty eco/event calendar. BTP’s initially extended Friday’s run as EU Moscovici softened language on next year’s draft Italian budget. Moody’s’ rate cut (to Baa3, stable outlook) was discounted with some even fearing more damage (junk). The Bund bottomed out as the BTP topped off early in the session. The EU and Italy reached out to negotiate, but large differences on the budget remain whatsoever. The US Treasuries’ slight underperformance is probably related to tonight’s start of the end-of-month refinancing operation. German yields declined by 0.9 bps to 1.2 bps yesterday with the belly of the curve outperforming. The US yield curve bear steepened with yields ending 0.4 bps to 1.2 bps higher. Peripheral yield spreads vs Germany ranged between -3 bps (Spain) and +2 bps (Italy).

The huge two-day rally on Chinese stock markets, backed by verbal and (effective?) market interventions, grinds to a halt this morning. Asian bourses lose 1% to 2% this morning. Japan underperforms on the back of a stronger yen. The US Note future trends higher, suggesting a positive opening for the Bund as well.

Today’s eco calendar contains EMU consumer confidence and the US Richmond Fed Manufacturing survey. Both are expected to show a minor setback from elevated levels, but will be second tier for trading. The US Treasury sells $28bn 2-yr Notes, with more supply coming tomorrow. It could be a trigger for more underperformance of US Treasuries. Fed governors Kashkari, Kaplan and Bostic recently addressed the press. That leaves general risk sentiment as today’s main driver. Core bonds could benefit from risk aversion. Italian BTP’s can stabilize in the short run as the EU and Italy placed opening bets and try to settle differences.

From a technical point of view, the US 10-yr yield retested previous resistance around 3.12%. The yield remained above this level, strengthening the break and suggesting more upward potential in the medium term. The cycle high stands at 3.26%, but next real key resistance only kicks in around 3.75%. The German 10-yr yield lost minor support at 0.48%. Strong support kicked in at 0.41%/0.42%. We don’t anticipate a return lower.

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