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Bond Markets Weaker Overnight; Pre-ECB Positioning Continues
Posted to: Micro News
Tuesday, June 3, 2014 9:23 AM

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Treasuries actually held up fairly well at the start of the overnight session and stayed in positive territory through Asian market hours.  Shortly after the European session opened, a somewhat brisk sell-off in core European bonds pulled Treasuries higher.

To Treasuries' credit, they fought back quite well.  For instance, German Bunds (the benchmark for the Eurozone and generally closest correlation to US Treasuries) moved up 5bps while Treasuries only rose 3.5bps. 

The overnight turning point was the release of 2 sets of data at 5am.  Eurozone employment improved just slightly and inflation fell less than feared.  Recent inflation data out of Germany provided some cause for concern that broader Eurozone inflation would have been decelerating more quickly.  An absence of rapid disinflation goes some small way to cast doubt on this week's probably easing announcement from the European Central bank.

There hasn't been any significant domestic economic data so far today.  Bond markets continued to weaken into the domestic session.  At 2.554 currently, 10yr yields still have room overhead to explore their expected 2.57-2.47 range ahead of the ECB announcement on Thursday. 

Even if that range doesn't hold, the general theme of the ECB approach is that of a month-end that got a bit overheated for bond markets last week with the first week of June marking a modest correction to the previously moderate exuberance.

For their part, MBS are doing about the same with Fannie 3.5s down 6 ticks at 102-14.

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