The ECB holds its weekly MRO tender

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Yesterday, global core bonds had a rather dull session in the absence of fresh eco or other news. The Bund tested the contract high as the German Dax tested key support, but the move lacked panache and failed, leaving the Bund virtually unchanged for the day. US Treasuries closed with modest losses, the belly once again underperforming. The US 2-yr Note auction went rather weak, but couldn’t influence the overall market. In a daily perspective, German yields were up to 1 bp higher till the 10-yr and down 1.8 bps at the very long end, while US ones were up to 3 bps higher (5-yr). Peripheral bonds had a strong run, as 10-yr yield spreads narrowed moderately.

Today, the euro zone eco calendar remains thin. In June, US Conference Board’s consumer confidence rose to a new post-crisis high, from 82.2 to 85.2, the highest level since early 2008. Historically however Conference Board’s consumer confidence remains quite poor as the long-term average is 92.5. For July however, the consensus is looking for a further minor improvement to 85.4. We believe that the risks are for an upward surprise as labour market conditions continued to improve, although geopolitical tensions are a risk factor. S&P Case Shiller home prices are forecast to have increased further in May, rising by 0.3% M/M, while the annual rate of growth is expected to have slowed from 10.8% Y/Y to 9.9% Y/Y. The annual rate has slowed already somewhat in the previous months and a further slowdown is likely.

The 2-day FOMC meeting starts today and concludes tomorrow evening with the release of the FOMC statement. Most likely markets won’t get much fresh information. There is no press conference scheduled and recently Yellen gave the green light for risk taking, suggesting that monetary policy won’t be used to reign in increased risk taking in a limited number of markets. Economic data released since the previous FOMC don’t warrant a change in policy (besides another $10B QE tapering). The market may concentrate though on the changes in the assessment of the economy. Since the June meeting, unemployment rate has dropped a further 0.2%-point to 6.1%, the level the FOMC governors projected to be reached by the end of 2014. The June statement said: “the unemployment rate, though lower, remains elevated.” If the “remains elevated” disappears, it would signal that the Fed moves closer to a rate hike. We are also closely looking whether there are dissenters with Fed governors Fisher and Plosser possible candidates. Finally, there may be some comments on excessive risk-taking, but it is a low probability.

Today, the ECB holds its weekly MRO tender. A total amount of €97.9B loans expire. Tomorrow, a new 3-month LTRO will be conducted as well (€13.19B is maturing). In our Sunset report, we’ll focus in detail on the OMO operation and its impact on eonia/excess liquidity in combination with the 3-yr LTRO repayment (€2.98B) and the change in autonomous factors. Currently, eonia trades at 4.4 bps and excess liquidity amounts to €112B.

In the US, the Treasury started its end-of-month refinancing operation with a weak $29B 2-yr Note auction. The bid cover was a little light (3.22 versus 3.37 average this year), but the auction stopped nonetheless slightly through the 1:00 PM bid side. Buy-side details showed especially weakness in the direct bid, which was less than half the average of the prior year, though the indirect bid was nothing to write home about either. Today, the US Treasury continues its refinancing operation with a $35B 5-yr Note auction. Currently, the WI is trading around 1.735%.

Overnight, most Asian equities trade with small gains despite slightly weaker Japanese eco data. The US Note future trades with a small downward bias, suggesting some downward pressure on the Bund in the opening as well.

Today, the eco calendar contains only US consumer confidence. It’s this week’s warming up release ahead of FOMC (which starts today and concludes tomorrow), ADP, GDP, payrolls and ISM. We see risks on the upside of expectations, which is a negative for core bonds, though the market reaction could be rather muted in light of coming events. So overall, we might be up for another slow trading session. Technical factors, like month-end extension buying, come into play as well. On the geopolitical scene, Israel’s Netanyahu told his country to brace for an extended military campaign in Gaza. The EU/US may move as soon as today to impose tougher sanctions against Russia. Asian markets didn’t use it as an argument to embrace risk off sentiment though. In yield terms, 2.46%/2.40% (US 10-yr) and 1.12% (German 10-yr) are still key support.

Last week, we suggested that investors might have underestimated the signal of the better EMU PMI’s and that it may turn out to be of greater interest for core bonds; in the sense that it may signal a bottoming out of the 6 month downtrend in yields. However, there is not enough evidence yet to base a long term view on. Nevertheless, in a first instance, we changed our view to a sell-on up-ticks, preferably near the highs.