Fed governors to rule out negative policy rates

Core bond trading was confined to narrow ranges yesterday. Both the German Bund and the US Note future slightly fainted during US hours. US Treasuries underperformed in a supply-related move. This week sees record US issuance. The US Treasury kicked off with a $42bn 3-yr Note auction, but 10-yr and 30-yr deals will follow. Treasury Secretary Mnuchin stressed the increased reliance of issuance of (longer term) debt as plotted out in last week’s quarterly refunding statement. Yesterday’s 3-yr sale in any case was well digested. The US yield curve bear steepened with yields rising 1.7 bps (2-yr) to 3.3 bps (30-yr). The German yield curve bear flattened with yields adding 2.8 bps (2-yr) to 2.2 bps (30-yr). 10-yr yield spread changes vs Germany barely changed with Greece (-5 bps) outperforming. No relief rally in peripherals thus after the Eurogroup decided on the ESM Pandemic Credit Line (up to 2% of 2019 GDP; no conditionality). Italian BTP’s didn’t react to Moody’s keeping the lowest possible investment grade rating (Baa3).

Most Asian stock markets lose ground this morning, ignoring WS’s late sprint yesterday. Fox Business reported that US President Trump will pull federal money (retirement funds) out of Chinese equities which risks retaliating Chinese measures and weighing on the countries trade relationship. China on his part has suspended meat imports from four Australian abattoirs (35% of Australian beef exports to China), probably in response to the Australian government’s blame game with regard to the origin of the Covid-19 virus. Core bonds trade a tad stronger this morning.

Today’s eco calendar contains US NFIB Small Business Optimism and CPI inflation. Several Fed governors are scheduled to speak. It will be interesting to hear comments on the negative (yield) part of the Fed Funds Future curve (2021). We expect Fed governors to categorically rule out negative policy rates. In combination with more US supply ($32bn 10-yr Notes), there is thus room for additional underperformance of US Treasuries. Tomorrow’s speech by Fed Chair Powell will be closely watched in this respect as well. This week’s eco calendar is generally backloaded with US retail sales, Empire Manufacturing (May), industrial production and Michigan consumer confidence all on Friday. Chinese retail sales, investments and industrial production data will be published as well that day.

From a technical point of view, the German 10-yr yield is trying to find a fresh equilibrium. For US yields, the Fed’s unlimited QE announcement is the de facto start of curve control probably reducing volatility. A trading range between 0.5% and 0.8% opened up.

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