European Bonds and Global Bond Indices
While European equities received uplift from encouraging Eurozone GDP data, a risk-off mood took hold across Eurozone bond markets, especially after weak US auto sales data send US Treasury yields sharply lower. Core curves bull flattened and the recently launched 10yr Bund benchmark, which will be re-opened today (see below), closed 3bp lower at 0.49%, marking the low end of the range it has traded over the short course of its life thus far.

EGB peripheral spreads saw an initial widening yesterday led by 5-10yr SPGBs – on Thursday Spain will tap the 5yr, 9yr and 25yr segment. Into the market close especially longer dated spreads were able to reverse the widening. In the end, only 3-7yr SPGB and PGB/Bund spreads stood wider – the latter by c. 3bp, although these hit fresh one-and-ahalf year lows yesterday. 10yr and longer BTP/Bund spreads were around 2bp tighter. In terms of today’s dataflow, the main focus is on the US ADP report, which is expected to hint at a solid payrolls report due on Friday, albeit it will be the hourly earnings growth figures that will shape the market’s reaction (here the consensus is for a pick-up in the MoM rate to 0.3%). EGB supply.
Today Germany will tap DBR 8/27 for €3bn. Outright yields don’t look that unattractive, as 0.49% still marks the upper end of the 0.15-0.50% range for 10yr German yields that prevailed in the run-up to Draghi’s Sintra speech on June 27. Moreover, the 10yr Bund also looks relatively appealing on a cross-markets basis, with DSL/Bund and OAT/Bund spreads at around their tightest levels in 12 months. The repo specialness of the DBR 8/27 (-1.32% s/n yesterday), also compared to other 10yr core paper, is another reason why we would expect the auction to get done at reasonable levels.

Elsewhere, Austria announced taps of the RAGBs 2/47 and 10/23 (€1.1bn in total) for its 8 August reserve date. The last time it did not make use of the reserve date was in 2014. Also note that Ireland’s NTMA yesterday cancelled another €500mio of the IRISH 2045 floater, held by the Central Bank of Ireland (CBI). These holdings are also relevant for the issuer limit of 33% for the PSPP, and as such the cancellation frees up room for the Irish central bank to conduct more PSPP purchases. Ireland is among the jurisdictions where the Eurosystem PSPP purchases undershoot the target implied by the capital key.