Core bonds rallied further early yesterday on geopolitical concerns and equity weakness, but the moves moderated towards the evening. Both the US and German 10-year yields finally ended the day lower by less than a bp. Intra-Euro-zone spreads narrowed mostly.
Yield moves are likely to remain limited today ahead of the Fed. Geopolitical tensions should keep a small downward bias on yields early today, but some upside pressure could stem from US inflation data in the afternoon.
European equities took losses, but S&P 500 managed to squeeze a 0.08% gain. Asian equities, in turn, are trading mixed this morning, while Europe is set to open slightly higher.
Negative T-bill rates back – overnight rate to follow soon
The Eonia overnight rate stayed low at 2.7bp yesterday, but both Germany and the Netherlands sold T-bills at negative yields. Germany sold 6-month bills at a yield of -0.0015%, while the Netherlands auctioned 3-month bills at a yield of -0.005%. France still had to pay slightly positive yields for its bills. Negative rates, albeit only marginally so, are thus back, and also negative overnight rates look likely, maybe as early as tomorrow.
Better news from the US housing market for a change
The US NAHB housing market index rebounded in June, from 45 to a 5-month high of 49. However, the NAHB Chairman warned builders are still facing strong headwinds, including the limited availability of labor.The increase in confidence was certainly welcome, but consumers appear to still be hesitant and waiting for stronger signs of recovery. Further such signs should materialize during the summer, and the US housing market recovery has much more room to go.
US inflation and construction data ahead
The highlight in today’s calendar will be the US May inflation report at 14:30 CET. Core inflation has picked up momentum lately, and risks are skewed towards a higher number. In the UK, May inflation at 10:30 CET will be watched closely after Mr Carney suggested last week rates could start to rise sooner rather than later.
Elsewhere in the calendar, the German ZEW index will be released at 11:00 CET, and US May building permits and housing starts at 14:30 CET. In addition, the ECB’s Nowotny will speak at 9:00 CET and the ECB will release the results of its main refinancing operation at 11:10 CET.
Nordea