Peripherals profit from Greek comments

Core bonds end session virtually unchanged

Core bonds ended the session virtually unchanged following some Greek-related volatility intraday. The eco calendar was empty. The US 5-yr Note went well, as did the Portuguese one, but the 30-yr Bund auction was awful. Talk from Greece that an agreement with creditors was been crafted sparked bond selling and equities/euro buying. However, the “Greek” enthusiasm fizzled out as both the IMF and German FM Schaeuble sounded rather disappointed. The latter said he didn’t understand the enthusiasm as little changed on the differences about the substance. The IMF said they won’t back a Greek reform pledge that makes no sense and wants to see primary surpluses. So, core bonds erased losses and equities moved higher, largely erasing Wednesday’s steep losses. The euro even kept its (small) gains. For US bonds, the month-end extension buying may have been supportive too. In a daily perspective, little changed though. In the US, the curve flattened marginally with yields up to 3 bps lower. In Germany, the curve bear steepened with yields up to 1.3 bps higher (30-yr).

Peripherals profit from Greek comments

On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed quite substantially after the Greek report said an accord was being crafted with the creditors. The narrowing happened late in the session, ignoring the rebound of the Bund. The Greek 10-yr yield spread outperformed (-79 bps). Spreads of Italy (-9 bps) and Spain/Portugal (-7/6 bps) kept their gains.

Eco calendar heats up with EC confidence and claims

In April, European Commission’s economic confidence weakened for the first time in five months and a further limited drop is expected for this month (from 103.7 to 103.5). The PMI’s showed a mixed picture with sentiment improving in the manufacturing industry, while weakening in the services sector and also consumer sentiment deteriorated further in May. We believe therefore that also economic confidence might weaken somewhat more led by a set-back in the core countries. Belgian CPI inflation data are not the most important ones, but it might give an indication for the German and euro zone readings next week. In the US, initial jobless claims edged up slightly last week but continued to hover around the recent lows. For the week ending the 23rd of May, a drop from 274 000 to 271 000 is expected. We have no reasons to distance ourselves from the consensus.

Good Italian auction? US ends refinancing operation

The Italian debt agency concludes this week’s scheduled EMU bond supply by tapping the on the run 5-yr BTP (€2-2.5B 0.70% May2020) and 10-yr BTP (€1.75-2.5B 1.5% Jun2025). In the run-up to the auction, the bonds cheapened in ASW-spread terms. Relatively to the Italian curve, the 5-yr BTP trades a tad rich while the 10-yr BTP is cheaper. Overall, we expect that this relatively small auction will go well. The corrective action on bond markets early May was used as an opportunity by investors at other peripheral auctions the past two weeks. Additionally, the debt agency taps a floating rate note (Jun2022) for €1.25-2B.

In the US, the Treasury continued its end-of-month refinancing operation with a decent $35B 5-yr Note auction. The auction stopped firmly through the 1:00 PM bid side and the bid cover was reasonable (2.46, down from 2.56 last month).
The buyside takedown figures were also a shade above average, and reflected another improvement in the Direct bid. Today, the Treasury concludes its operation with a $13B 2-yr FRN auction and a $29B 7-yr Note auction.
Currently, the WI of the latter is trading around 1.89%.

Today: test of 0.50% support in German 10-yr yi

Overnight, Asian stock markets trade mixed with China underperforming (-2%). The PBOC warned of deflationary pressure, a growing number of brokerages tightened requirements on margin financing and a takeover deal fell through. The US Note future trades stable suggesting a neutral opening for the Bund.

Today, the eco calendar contains EC confidence (EMU) and weekly claims (US). ECB Nowotny and Fed Kocherlakota (very dovish) speak but are unlikely to stir markets. Risks for EC confidence are on the downside of expectations.
Greece is a wildcard which might create more volatility. Greek officials tend to be optimistic while official creditors (eg Schaeuble, IMF) are less hopeful. End-of-month extension buying is positive as well. Yesterday, the Bund future took out the 38% retracement level from the May sell-off (154.97). If this break is confirmed by a break of the 10-yr yield below the similar support level (0.50%), it would be a bullish signal for the Bund. We might be up for a test today. In the US, the Note future approaches the upper bound of the sideways range (128-04+/12 and 126).