Italian treasury launches a new 3-yr BTP

Rates

On Monday, global core bonds had a quiet start to the trading week amid an empty eco calendar. Volumes were extremely low and trading ranges small. European central bankers slightly downplayed the importance of the June meeting, but didn’t influence bond markets. At the end of the day, German yield changes were small and ranged between-0.3 bps (2-yr) at and + 1 bp (30-yr). The US underperformed on the back of a strong equity performance. The Dow Jones reached a new intraday high and the S&P failed inches below that hurdle. The 2-yr yield added 1.2 bps, the 5-yr gained 3.5 bps, the 10-yr increased by 3.8 bps and the 30-yr closed 3.4 bps higher.

Today, the focus will be on the US retail sales, but also the US NFIB small business confidence indicator and German ZEW survey are on the agenda. EU General Affairs Ministers meet in Brussels and Holland (DSL), Norway (Bonds), Italy (BTP) and Germany (Bund Linker) will tap the market.

After a very strong March report, US retail sales are forecast to show a more limited increase in April. The consensus is looking for an increase in retail sales by 0.4% M/M following a 1.2% M/M gain in March. While auto sales are forecast to have dropped, this should be mostly offset by an increase in gasoline station sales. Retail sales excluding autos and gas are forecast to have increased by 0.5% M/M, as is expected for the control group. We believe that the risks are for a slightly weaker outcome following strong data in March. Also in the US, the NFIB small business confidence indicator is forecast to extend its rebound in April. The consensus is looking for an increase from 93.4 to 94.5, following already a pick-up in March. If confirmed, the index would be again at its post-crisis high. Small business confidence failed however to rise above this level for several times and we believe that also this month a stronger outcome is unlikely. In Germany, the ZEW indicator is forecast to continue its recent trend, showing a further improvement in the current assessment, while the expectations index is forecast to have weakened somewhat further in May. We have no reasons to distance ourselves from the consensus.

The ECB conducts its weekly MRO tender and SMP sterilization operation. For the 7-day MRO, €129.1B matures. Regarding the SMP tender, we expect that the ECB will be able to drain the portfolio again as the 1-week eonia rate fell back below the 0.25 bps refi rate, making it more attractive for banks to give surplus cash to the ECB. Tonight, we’ll report in detail on the OMO operations and their impact on eonia/excess liquidity.

Today , the Italian treasury launches a new 3-yr BTP (€3.5-4B 1.15% May2017) and taps the on the run 7-yr BTP (€1.75-2.25B 3.75% May2021) & two off the run 30-yr BTP’s (€0.5-1B 5% Aug2034 & 4% Feb2037). Sentiment towards periphery remains positive and is supportive for the auction. Grey market trading indicates that the new 3-yr BTP will come with a 7 bps pick-up compared to the previous Dec2016 benchmark. This corresponds with a 12 bps pick-up in yield terms. The May2021 BTP cheapened around 7 bps in the run-up to this auction and trades normal on the curve. Regarding the off-the run 30-yr BTP’s, both bonds are rich at the very long end of the curve, especially Feb2037. Nevertheless, we believe that demand will be there as they are most likely tapped on specific dealer demand. The Dutch debt agency taps the on the run 10-yr DSL (€3B 2% Jul2024). The bond cheapened around 1 bp going into the auction and trades rather cheap at the 10-yr part of the Dutch yield curve.

Overnight, most Asian equity markets trade positive copying WS’s gains. Indian equities have touched their latest in a series of record highs, reflecting the result of overnight exit polls that signalled a strong election win for Narendra Modi. Chinese eco data, just released, were weaker than expected and temper the enthusiasm at the end of Asian trading. The US note future trades neutral.

Today the eco calendar heats up with German ZEW and US NFIB small business optimism & retail sales. Risks for the US figures are on the downside of expectations, which is supportive for core bonds. However, of late core bond markets proved quiet resilient for eco data and with key resistances still nearby (both the US Note future and the German Bund are very close to the contract highs, respectively at 125-06+ & 145.03.), chances on strong gains on weaker data seem rather small. ECB’s Lautenschlaeger and Weidmann speak and we continue to look out for clues on the June meeting. Yesterday, ECB’s Constancio and Nowotny slightly downplayed the importance of that meeting, but markets didn’t react. Finally, risk sentiment on equity markets remains a factor as well.

Technically (in yield terms), the German 10-yr yield tests the recent lows around 1.44%. It’s difficult to ignore the technical signal that we remain below 1.50%, which suggests that sentiment remains positive for core bonds. In the US, the 10-yr yield is again at the lower bound of the sideways range but here there is no technical break yet (picture neutral).