Flight to safety prevails courtesy of Mr Trump. US President Trump’s North Korea comments unleased a flight to safety bid in EGB markets yesterday, with 10yr Bunds rallying and peripheral spreads widening sharply. Price action was very much futures driven, though, with flows in cash space, reportedly, still subdued (ie, in holiday mode).

The 10yr bund yield temporary rebounded somewhat after the news that the 5yr OBL tap was technically uncovered but eventually closed almost 5bp lower. The auction of US 10-year notes – that took place after the European close – also felt the pinch, causing Treasuries to pare some of the earlier gains – while pointing to slightly higher Bund yields this opening.
The damage to semi-core and peripheral spreads (of respectively 1bp and 3-5bp in the 10yr area) would likely have been more pronounced if not for the soothing words from US Secretary of State Rex Tillerson on the ‘threat’ from North Korea. Interestingly, the widening of core govie ASW spreads, particularly in the 2-5yr area, has rendered SSAs more attractive again versus govie peers (see for example KfW 1/21 versus DBR 1/21).

urther out the cure, we also find the z-spread concession at which 20yr KfW trades versus Bunds drifting towards year-to-date highs again (Figure 1). With little data of significance due for release in the Eurozone, European bond markets will probably continue to take their cue from the US in the remainder of this week, with today’s auction of 30yr Treasuries and tomorrow’s US CPI reading – which could well surprise on the upside – standing out. EGB supply dries up.

Activity in the primary EGB market has come to a full standstill. There are no auctions scheduled for the next two weeks – the next planned re-opening is that of the 10yr Bund on August 23. Towards the end of this month we also expect Finland to launch a new 10yr benchmark via syndication. Note that the DSTA yesterday reaffirmed that the launch of the new 7-year DSL via DDA will take place in September or October.