The Irish treasury taps the on the run 10-yr IGB

Rates

Yesterday, global core bonds traded with a small downward bias throughout the European and part of the US session That changed after the FOMC Minutes. Markets read them from a dovish angle, sending bonds and equities sharply higher. The dollar lost some ground against the euro. The reaction was obviously a curve-dominated one. Especially the shorter end profited from the prospect that the Fed would not start hiking rates early. US 2- and 5-yr yields ended 3.2 and 4.3 bps lower. The 10- and 30-yr yields, on the contrary were 0.9 and 3.5 bps higher, as they couldn’t fully offset earlier intraday increases. The Bund market was closed before the publication with yields up to 1.8 bps higher. The Minutes might still affect the European bond market today, but given the US curve reaction (especially short end), the impact should be minor.

Three elements likely drove the market reaction and suggest that the hawkish reaction after the FOMC meeting was overdone. First, there was some more concerns about too low inflation with a couple of members even preferring that the FOMC would keep rates low if the projected inflation remained persistently below the 2% longer-run objective. It didn’t get into the statement though.
Second, some were concerned that the rate projection path (which shifted higher versus December) would mislead observers in thinking that the reaction function had become less accommodative. However not all FOMC members agreed. Here is the full quote: “A number of participants noted the overall upward shift since December in participants’ projections of the federal funds rate included in the March SEP, with some expressing concern that this component of the SEP could be misconstrued as indicating a move by the Committee to a less accommodative reaction function. However, several participants noted that the increase in the median projection overstated the shift in the projections. In addition, a number of participants observed that an upward shift was arguably warranted by the improvement in participants’ outlooks for the labor market since December and therefore need not be viewed as signifying” Third, during the post-FOMC meeting press conference, Ms. Yellen suggested that once QE stopped, it may take 6 months before rates were raised for the first time. In the statement, it was stated as a considerable period of time. In the Minutes, there was no trace of a debate on the possible length of the “considerable” time. Concluding, the bond market which was already in a correction mode since the payrolls report, reversed somewhat more of the post FOMC meeting losses. Nice move, but it doesn’t change the big picture.

Last week, US initial jobless claims edged up significantly, from 310 000 to 326 000, although there were no special factors available. For the week ending the 5th of April, the consensus is looking for a limited drop, from 326 000 to 320 000, reversing only part of the previous week’s uptick. We believe however that the risks are for a lower outcome as seasonal adjustment factors are favourable. Nevertheless, at the start of a new quarter, claims are often subject to higher volatility. US import prices are expected to have increased slightly in March.

The Irish treasury taps the on the run 10-yr IGB (3.4% Mar2024). It’s the second regular tap auction since 2010. The bond didn’t really cheapen going into the auction, though it underperformed the previous benchmark (3.9% Mar2023) by some 3-4 bps in the run-up. The Irish curve is still rather steep (underperformance long end of late), which thus offers a pick-up at the 10-yr bucket and should be supportive for the auction. We believe the auction will go well. Greece is expected to launch a new 5-yr syndicated deal (Apr2019) today. This marks the return to the capital market following a 4-yr absence. Greece aims to sell €2-3B, as Greek FM Stournaras indicated earlier on several occasions. According to sources, the order book is already > €10B. For an extended preview, see yesterday’s Sunset report.

Overnight, Asian equity indices trade mixed to slightly positive. The gains are rather disappointing though considering WS’s comeback on the FOMC Minutes. Australian employment data were stronger whereas Japanese eco numbers disappointed. The US Note future extends yesterday’s late gains, suggesting a higher opening for the Bund.

Today, the eco calendar contains some less market-relevant inflation and industrial production numbers in several EMU countries. In the US, only jobless claims are up for release. ECB Praet and Constancio comments and the situation in Ukraine are wildcards, but markets will likely continue digesting the FOMC Minutes (see above). The Greek bond issue will also dominate headlines all day long. Overall, we have a neutral stance for today within the established ranges.

Technically, the US 10-yr yield failed to break north of 2.80% after the in line with consensus payrolls. The soft FOMC Minutes enforce this resistance. We believe the US 10-yr yield will remain in the 2.6-2.8% trading range, perhaps even until the next payrolls in May. For the German 10-yr yield, this trading range is between 1.5-1.7%. In the short term, support might be under pressure if the ECB QE debate intensifies.