We see encouraging signs that demand for duration in EUR markets will remain healthy into the end of the year, at least from the latest SURE offering. There was also some good evidence of duration buying from most recent flows data. These factors together with Eurozone macro angst are acting to keep the lid on US Treasuries, but not on the wider spread to Bunds.

Overnight: more fiscal noise

The tone of US fiscal stimulus-related comments was overall positive helping 10Y treasury yields (SPTL) above the significant 0.80% resistance (see next section). Mnuchin and Pelosi reportedly made progress in talks yesterday, and Trump signalled he could support the Democrats' $2.2tn proposal

US 10yr versus the 80bp hurdle

Flows data in the past week clearly show buying in long duration product, which is acting to mute upside potential for yields. In fact the distinguishing characteristic of the most recent flows data through to the middle of last week was of more long-end developed markets government bond buying, and a ratcheting lower of buying in corporate bonds.

This bid for core duration presents a clear hurdle for a sustained break above 80bp for the 10yr. And if it did break, it seems unlikely that there would be an imminent follow-through move towards the holy grail of 1%. Even though core Eurozone (EZU) yields have come off their lows, they sustain an anchor effect for Treasuries. The Treasury-Bund spread has stretched wider, but there is a limit to how far this can go in the absence of outright selling of Treasuries. 

There is one event that could prompt bond selling (risk-on), and that would be a "vaccine moment". Such an event, which is probable some day in the coming couple of months, would present a clear path away from a Covid-impacted landscape. Covid would persist of course, but at least there would be clarity that it will, with reasonable certainty, come to an end. Part of this is discounted, but not all of it. In the absence of that, the 80bp level for the US 10yr could well present a tough ceiling to crack.

Demand is there if bond sellers emerge

Given the lack of tangible improvement in sentiment in other markets, we are tempted to attribute yesterday’s weakness in core EUR government bonds globally to the weight of supply. Of the other themes driving financial markets at the moment, we fail to see a material change in either the tone of Brexit soundbites (slightly more upbeat at the margin), odds of fiscal stimulus before the election (low in our view despite recent comments), US election result (Biden victory and ‘blue wave’ still the most likely outcome), or odds of ECB easing (high likelihood in December).

The message from the EU’s jumbo €17bn dual tranche social deal was mixed for direction. In the short term, one can expect that money spent to invest in this deal would not find their way to other corners of the fixed income market. Longer term, the record-breaking €233bn of orders point to latent demand for core duration that should underpin low rates into year-end. Of the two factors, we expect the positive signal about investors' demand to be most relevant for EUR direction (FXE).

Today's events: central bank speakers

The economic releases calendar is particularly empty but there is a decent number of central bank speakers scheduled. ECB speakers will be closely watch before the start of the pre-meeting quiet period.

In supply, Greece has mandated banks for a tap of its 2035 issue, and the US Treasury auctions 20Y T-bonds.