Tensions on EMU bond markets ease, apart from Greece

Rates

Yesterday, global core bonds initially lost part of Monday's risk-off gains, as risk sentiment on EMU bond markets didn't deteriorate further. Weak German production data and a slightly smaller than expected US trade deficit, the only data on the agenda, couldn't influence trading. In mid US session, US Treasuries and Bunds rallied higher without obvious reasons. Admittedly, oil prices dropped lower and equities fell after opening gains, but it is unclear why that should have been bad for peripherals or why that should have caused an underperformance of the short end of the US Treasury curve especially ahead of today's 10-yr Note auction. The solid 3-yr Note auction pushed core bonds to the peak of the day, before ending with small daily gains.

In a daily perspective, the belly of the German yield curve outperformed with yields 0.8 to 2 bps lower. The US yield curve flattened with yield changes ranging between +1.6 bps (2-yr) and -2.9 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads were nearly unchanged (+2 to -2 bps) with Greece underperforming (+15 bps). The front end of the Greek curve suffered most with the curve inverting further. Greece has big redemption dates in July, but the Troika are still bickering over the conditions for the IMF's involvement in the 3rd bailout programme.

Today's US and EMU eco calendars are devoid of market moving data releases. The UK House of Commons completes it debate on the art. 50 bill, which normally shouldn't bring surprises. Portugal, Germany and US hold auctions (see below).

Heavy supply

The German Finanzagentur taps the on the run 10-yr Bund (€3B 0.25% Feb2027). The Bund didn't cheapen in the run-up to the auction in ASW-spread terms. On the contrary, the recent risk-off bout made it more expensive. However, compared to surrounding bonds on the German yield curve, the Feb2027 DBR us rather cheap. Total bids at the previous 4 Bund auctions averaged €5.14B. Despite the relatively low amount on offer (€3B), we expect plain vanilla demand at best. The Portuguese Tesouraria sells the on the run (2.2% Oct2022) and off the run (5.65% Feb2024) OT's for €1-1.25B. Both bonds cheapened in ASW spread terms going into the auction and the Feb2024 OT is the cheapest bond on the Portuguese curve. We expect the auction to go well. The Finnish debt agency announced the launch of two new RFGB's via syndication in the near future (likely today): 5-yr RFGB (Apr2022) and 30-yr RFGB (Apr2047).

The US Treasury started its mid-month refinancing operation with a solid $24B 3-yr Note auction. The bid cover was ok and the auction stopped through the 1:00 PM bid side. Bidding details showed strong buy-side demand. Today, the Treasury continues with a $23B 10-yr Note auction. Currently, the WI trades around 2.37%.

Eyes on EMU bond markets amid empty calendar

Overnight, Asian stock markets trade mixed with Japan outperforming. The US Note future and Brent crude give no indication for the start of European trading. We expect a neutral start for the Bund.

Today's eco calendar is empty apart from heavy supply. The main trading theme will be developments on EMU bond markets. Monday's spread widening (see above) caused a global safe haven bid, but was partly reversed yesterday. Stress over French elections, the Italian financial sector and the Greek bailout take the upper hand. The short term technical picture of the Bund improved after the break above 162.49/62, suggesting more upside towards 164.90. The US Note future approaches the key 125-09/16 resistance area. Longer term, we hold our negative views on both German Bund and US Note future on the back of accelerating growth and inflation. US investors still have to adapt to the Fed's 2017 rate hike scenario (3 hikes) while European investors might face another "recalibration" of the ECB's APP-programme in H2 2017.

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