Global core bonds traded mixed today with German Bunds outperforming US Treasuries. German Bunds temporary lost a few ticks at the opening after German January producer inflation printed above expectations. The move was short-lived as ECB’s Praet struck a cautious tone on new TLTROs. He said the bank will discuss a fresh liquidity injection for the banking sector at the March ECB meeting but was unsure whether any decision will be made at that time. German Bunds soon rebounded and maintained the upward slope throughout the day. The German yield curve moves lower with changes up to -1.0 bp (30-yr). US Treasuries moved modestly higher but reversed trend once US investors joined the debates. Investors are awaiting more news from the US-Sino trade talks in Washington and from the Minutes of the January Fed meeting , scheduled for release tonight. The latter might provide more information on the Fed’s balance sheet run-off process and the future interest rate guidance. US Treasuries are treading water at the time of writing. The US yield curve steepens with changes up to +2.2 bps (30‑yr). Praet’s comments weighed on Italian BTP’s, together with Deputy PM Salvini ruling out any budget adjustments despite the economic downturn. The peripheral spreads over the German 10-yr yield are stable with Italy underperforming (+6 bps).

There was little news to guide trading in the major USD or euro cross rates today. The eco calendar was almost empty. ECB’s Praet confirmed that the ECB is weighing the options regarding new TLTRO’s, but he brought no details on the timing or the structure of a new program. Overnight, headlines on the US asking China to ‘stabilize’ its currency can be considered as a potential USD negative over time. However, the direct impact on the dollar (except for USD/CNY) remains limited for now. EUR/USD revisited this week’s ‘peak’ levels in the 1.1350+ area early in Europe, but there was no strong enough driver neither from the euro side nor from the USD side of the story. EUR/USD settled in a sideways range (currently 1.1335 area). The yen continues to trade soft as markets ponder the impact of soft comments by BOJ governor Kuroda yesterday and this morning. The pair is changing hands in the 110.75 area. The Fed minutes to be published this evening are probably the next point of reference for USD trading.

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Sterling took a breather after yesterday’s remarkable rally. The focus remained on UK politics and on the UK-EU Brexit talks, including a meeting between UK PM May and EU’s Juncker. Three Conservatives MP’s left the party, probably making it even more difficult for UK PM May to get any Brexit deal approved by Parliament. Sterling lost a few ticks during the day, but it is still difficult to assess what the new independent group of MP’s will mean for the outcome of the Brexit process. Sterling resilience (EUR/GBP currently near 0.87) suggests that markets assume that there is still a good chance that a disorderly no-deal Brexit can be avoided (via a delay or another outcome).

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The South African budget deficit is set to widen to 4.5% in the next fiscal year, the finance minister said while presenting the national budget. That is mainly the result of bailing out Eskom. The country’s distressed power utility is projected to receive $4.8 bn. over 3 years and will have some of its business privatized. Debt to GDP is expected to breach 60% in 2023/24 which might trigger alarm bells at Moody’s, the last rating agency to grant South Africa investment grade status. The rand tanked initially but recovered quickly.

Three pro EU Conservatives have left the party in protest of May’s brexit strategy, which they say is being directed by Conservative Eurosceptics. They are to join the new “Independent Group”, a party recently created by 7 former Labour MP’s who quit the Labour party out of frustration with leader Corbyn.


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