Thu, Jul 29, 2021 @ 11:23 GMT
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US Real Yields Remain Sticky Near Absolute Low Levels

Markets

Monday’s rebound didn’t really drag that far. Trading dynamics in most markets slowed to a trickle. Intraday moves didn’t alter standing trading pictures. Eco data hardly grabbed the headlines despite consensus-beating Richmond Fed manufacturing index and despite the best EC EMU consumer confidence print since early 2018. The $60bn US 2-yr Note auction – a stronghold in auction space – tailed with indirect bids receding. Following the recent 10 bps increase in yields at the front end of the curve, it suggests that some are side-lined with more (US rate hike bets) to come. Dovish remarks by FOMC Chair Powell and NY Fed Williams were echoes from earlier speeches. Cleveland Fed Mester did provide some additional insights. She believes that a taper call is something for fall, allowing to assess some additional job market data first. She wouldn’t reveal on where she stands regarding a first rate hike but clearly stressed that the FOMC will stick to the sequencing principle of ending net asset purchases before hiking interest rates. Recapping yesterday’s market action: European stock markets gained less than 0.5% while US indices ended 0.2% (Dow) to 0.8% (Nasdaq) higher. US Treasuries outperformed German Bunds. US yields fell by 2.3 bps to 3.2 bps with a slight outperformance of the front end of the curve. US real yields remain sticky near absolute low levels. German yields added 0.4 bps (2-yr) to 1.4 bps (15-yr) on the day. 10-yr yield spread changes vs Germany ended near unchanged. The dollar corrected again slightly lower in FX space, but holds on to most of its post-FOMC gains at an 1.194 close.

Asian stock markets trade mixed this morning with China outperforming. The German Bund and US Note future missed their wake-up calls while the dollar gets the benefit of the doubt. The eco calendar is interesting with June EMU PMI readings. Consensus expects a boost to services especially as most EMU countries, including Germany, eased lockdown restrictions further. Consensus outcomes of 62.3 for manufacturing and 58 for services should be manageable. We are eager to see whether EU markets have an eye for potential upward surprises. It could in any case continue the Bund’s underperformance against US Treasuries, but will it also be able to finally alter trading dynamics in EUR/USD to the European side of the story? We don’t front run on such switch yet and let the data speak first. Speeches by Fed governors Bowman and Rosengren are wildcards for trading as is the US Treasury’s 5-yr Note auction. Sterling remains marginally better bid against the euro (EUR/GBP 0.8550 area) ahead of tomorrow’s BoE meeting which risks becoming a non-event.

News headlines

The median price for US existing houses rose a record 23.6% y/y to top $350.000 for a first time in May. The National Association of Realtors said price increases were recorded in every region of the country. Since last summer, prices have been climbing sharply, partially as a result of the pandemic-related lockdowns and people rushing to find more space and bigger homes. The price raises are contributing to a slowdown of the pace of home sales though, with existing home sales falling for a fourth straight month with 0.9% m/m in May. But despite all that, demand still outstrips supply.

A truce in the Brexit trade dispute, the “sausage wars”, is in the making, British and European officials say. The UK opting not to introduce some checks on goods crossing into Northern Ireland, saying it is hurting local communities lies at the heart of the conflict. Without a solution after the grace period ends June 30, a ban comes into force on the sale of chilled meats and fresh sausages into NI (which remained under EU custom’s rules as part of the Brexit deal) from the rest of the UK. The British government has now asked the EU to extend this grace period, which the bloc didn’t dismiss right away. It will discuss next steps at a meeting tomorrow.

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