The German Bund set a new high

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Greek election headache for EU, but less for markets?

On global core bond markets, sentiment remained bullish post-ECB and pre- Greek elections. The German Bund set a new high (158.94) with the German 10-yr (0.345%) and 30-yr yield (1%) reaching new all-time lows. In a daily perspective, German yield changes vary between +0.4 bp (2-yr) and -8.5 bps (10-yr). The very long end did even slightly better. The US yield curve bull flattened with yields 3 bp (2-yr) to 6.6 bps (10-30-yr) lower. On intra-EMU bond markets, 10-yr yield spreads versus Germany were mixed. Greece (-45 bps) and Portuguese (-14 bps) outperformed, while yields of Spain and Italy widened 5- 6 basis points. Besides the decline of the bonds, also the European equity gains and the euro decline were still the result of the ECB decision that went further than expected.

The eco calendar is thin today with only the German IFO business climate indicator. Eurogroup Finance Ministers meet in Brussels.

In January, the German IFO business climate indicator is forecast to have risen for a third consecutive month. The consensus is looking for an increase from 105.5 to 106.5 in January. After slightly better PMI’s last week, we believe that also the German IFO might surprise on the upside. The weaker euro and lower oil prices might support business sentiment. The ECB decisions came too late to affect the survey. The Euro group meets today and will doubtless prepare the discussions that will have to be held with Greece later on. They will also welcome the new EC attitude on fiscal policy. All statements from Greece will be followed with attention and may drive the markets. An agreement with the Troika will likely take a lot of time. But as both sides have all the interest to avoid a Grexit, we believe in the end an agreement will be reached. A Grexit, of course, remains to some extent a risk scenario.

In the US, the FOMC will meet on Tuesday/Wednesday. Markets (and we) expect them to keep the patient phrase, suggesting no rate change in the next two meetings, which makes June the first possible opportunity for such a move The FOMC will show optimism on the economy, but some concerns about the strength of the dollar and too low inflation will refrain them to become too bullish on the economy and thus avoid any reference that they may start raising rates in the near future. Especially low inflation will animate the debate inside the FOMC.

The issuance calendar is interesting, coming after the announcement of the ECB QE programme. We will be looking how this decision affects investors’ behaviour at primary auctions. On Tuesday, the Dutch debt agency issues its DSL 2.75% January 2047 for an amount of €1-2B. Yield on the long bond is 1.118%. It has an outstanding of €5.2B and was launched first early 2014. Italy holds a CTZ/BTPei auction tomorrow and a BTP/CCTeu auction on Thursday. More info will be made available during the week. On Wednesday, Germany tops up its 2.5% August 2046 for an amount of €2B, again a very long maturity with yield slightly above 1%. In the US, the Treasury holds its end-of-month financing operation consisting of 2-, 5- and 7-year maturities.

Overnight, Asian equity markets trade mixed and off intra-day lows. Commodities (oil, copper) are under some pressure and the Greek left Syriza party gained the election, which is a risk-off element, but we don’t think there will be extensive contagion towards other peripherals. The ECB QE after all offsets much of this contagion danger. We are curious to see how far these spreads might widen and how long the widening stays. The US Note future trades initially higher, but lost most of its Asian gains. EUR/USD tested the lows, but rebounded. So, the Bund opened marginally higher.

Today, attention for the ECB QE decision of Thursday will wane. Greece might get a lot of media attention and might initially negatively affect the European riskier assets and benefit the Bund. However, last week, we wrote extensively on the Greek elections and concluded that uncertainty was likely, but ultimately Greece and the EU are condemned to find a solution. So, we think that the negative reaction will mainly be felt in the Greek bond and equity markets. For the Bund the initial strength may be put into question by a stronger IFO business confidence. The Bund might even be vulnerable from a technical point of view as its overbought character suggest that some profit taking is enticing. Of course, we should also bring the FOMC meeting (concluding Wednesday into account). This might weigh on activity and keep investors shy to put big bets.

Once the QE programme begins, flows will play a very important role on EMU bond markets and will likely act as a key constraining influence on upward potential of most EMU bond yields.