Greek election headache for EU, but not for markets?

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On intra-EMU bond markets, Greek bonds underperformed following the Syriza election victory. The Greek yield curve shifted 40 bps to 160 bps higher with an underperformance of the short end of the curve (further inversion). Left-wing Syriza gained 149 seats in Greek parliament (300 seats) and already found a coalition partner, the Independent Greeks (ANEL). So, discussions with Europe will start fast.

The Bund opened slightly stronger (new high 159.05) on the back of the Greek election result. However, the impact on global markets was negligible and Bunds gradually eased throughout the session. European equities continued their bullish run with a new all-time high for the Dax. The German IFO improved further and the combination of equity and eco data strength explains the downward intraday bias of the overbought Bund. Finally, the German yield curve shifts 1.8 bps (2-yr) to 4.6 bps (8-yr) higher. The 30-year yield added 3.3bps. US yields rose by 2.4 bps (2-yr) to 3.4 bps (7-yr).

The US eco calendar is well-filled. University of Michigan consumer confidence improved sharply in January, reaching new post-crisis highs. Today, it will be interesting to see whether the Conference Board’s measure shows a similar picture. The consensus is looking for an increase in consumer confidence from 92.6 to 95.5, which if confirmed would also be a 7-yr high. The risks are for a downward surprise as the Michigan indicator tends to respond stronger to oil price changes. US durable goods orders have been quite poor in recent months, with especially the ex-transportation measure disappointing. For December, the consensus is looking for an increase in the headline figure by 0.4% M/M, while the ex-transportation measure is forecast to show a more substantial increase by 0.6% M/M. We have no reasons to distance ourselves from the consensus. The Richmond Fed manufacturing index is forecast to have weakened marginally in January after already under performing the other business confidence surveys. We see risks for an upward surprise. Finally, US new home sales are forecast to have picked up by 2.7% M/M to 450 000 in December after two consecutive monthly declines. We believe that the risks remain for an upward surprise especially as also weather conditions should support sales.

Today, the Dutch debt agency taps the on the run 30-yr DSL (2.75% Jan2047) for €1-2B. In the run-up to the auction, the bond underperformed (cheapened) against the rest of the longer-dated Dutch bonds because it doesn’t fall under the scope of the ECB’s QE-programme with its 32-year maturity. Starting in March, the ECB will buy sovereign debt with maturities ranging between 2 and 30 years. For the Netherlands, we expect that the additional yield pick-up outweighs the fact that it doesn’t fall in the scope of the ECB. Therefore, the auction should go well. Italy sells zero-coupon and inflation-linked bonds. In the US, the Treasury starts its end-of-month financing operation with a $26B 2-yr Note auction and a $15B 2-yr floating rate note auction. Currently, bonds are trading around 0.545% and 0.102% respectively.

Overnight, most Asian equity markets trade positive. Japan outperforms while China under performs. Chinese industrial profits fell 8% Y/Y in December. Microsoft earnings fell short of expectations but didn’t effect sentiment. European earnings (Siemens, Philips) look weak, but Novartis strong. The US Note future trades stable, suggesting a neutral Bund opening.

Today, the eco calendar heats up in the US with durables, housing data, consumer confidence and Richmond Fed Index. Risks for the reports are balanced so we have no strong guidance for bond trading. Volumes are expected to be low, with traffic at the US east coast paralyzed by a blizzard. Another paralyzing factor for trading is the FOMC meeting that starts later today (statement tomorrow). Rate markets don’t buy the Fed’s rate projections and expectations of a first hike this Summer. However, going into the meeting, some scaling back of long positions is possible as investors don’t want to be caught on the hawkish side. While sentiment on core bond markets remains bullish, yesterday’s corrective action could go somewhat further.

Longer term, once the ECB 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.