Global core bonds trade mixed today with US Treasuries underperforming German Bunds. The main move of the day (sell-off US Treasuries) occurred after rumours that China is contemplating to slow or halt US Treasury purchases from its giant FX reserves. That would come at a time when the US Treasury needs to plug a bigger funding hole. The Bloomberg article triggered more selling and curve steepening in an already fragile US bond market. The US 10-yr yield broke above 2.5% (minor) resistance yesterday and is now definitively on its way to key 2.63%/2.64% resistance (2016/2017 highs). Tomorrow and Friday’s inflation readings could be a trigger. US yields add 0.4 bps (2-yr) to 4.4 bps (30-yr) on a daily basis. Rising inflation (expectations), a tight labour market, strong growth and global policy normalization were already at play. The German bund whipsawed around opening levels amid an empty eco calendar. The €5bn German Bund auction drew only €4.56bn bids, but that’s no recent phenomenon. Changes on the German yield curve are limited to 1 bp. Peripheral yield spreads widen marginally. The Italian debt agency successfully launched a new 20-yr BTP via syndication (€9bn 2.25% Sep2036). The Portuguese Treasury raised €4bn via a syndicated 10-yr PGB launch (Oct 2028).
This morning, it looked that the dollar would follow a similar pattern as it did yesterday. USD/JPY remained in the defensive as the yen held strong after yesterday’s reduced BoJ bond purchases. EUR/USD didn’t decline further and EUR/USD settled in the 1.1925/50 area. The headlines on the China reserve policy also unsettled USD trading. The dollar was hit quite hard even as interest rate differentials widened in favour of USD. Investors concluded that less Chinese appetite for US assets could also reduce the share of USD in Chinese FX reserves, triggering USD selling. USD/JPY trades near 111.50. EUR/USD hovers around the 1.20 pivot.
Sterling trading was again mainly driven by the broader price moves in the euro and the dollar. EUR/GBP traded with a positive intraday bias. The pair rebounded from the 0.8820 area to 0.8870, supported by the intraday rise of EUR/USD. Some sterling softness was also at work, probably as markets were disappointed by the UK government reshuffle. UK eco data (production, trade balance, GDP estimate) were mixed to OK, but didn’t help sterling much. Cable trades in the 1.3535 area and hardly profits from the overall USD decline.
Stock markets got a snag from the bounce in volatility after the Chinese rumours. European indices lose up to 0.5% with Germany underperforming (-0.90%). Openings losses on US bourses amount to 0.3%.
News Headlines:
Officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of US Treasuries, according to people familiar with the matter. Markets reacted nervous (see above).
Scandinavian currencies were in good shape ahead of the Chinese news. The Norwegian krone profited from higher-than-forecast Norwegian inflation readings (1.6% Y/Y headline and 1.4% Y/Y core CPI) with EUR/NOK temporary hitting 9.60. The Swedish krona received a boost after the publication of slightly more hawkish than expected Riksbank Minutes. Governors Ingves suggested that the Swedish central bank could start its normalization process earlier than the ECB. EUR/SEK reached an intraday low around 9.75.
The Polish central bank kept its policy rate unchanged at 1.5% as widely anticipated. Governor Glapinski and the other central bankers will comment on the decision later this afternoon.
