Markets: fixed income
On Wednesday, global core bonds had a tight sideways trading session, as had EUR/USD and more or less equities too, which were left with some very minor losses in the close. In the US, yields rose less than 1 bps across the curve with the 5-year the exception (+ 2 bps).
Marginally higher losses in Germany where yields rose by 1.2 to 2.6 bps. The German Bobl and the US 10-year Note auctions were plain vanilla.
They very temporary moved the overall market, but without lasting effects. There were no eco releases and the speeches of Fed Williams and Lacker (see below) were also ignored. The absence of really breaking news on Greece and the upcoming ECB and BoE meetings only convinced investors to stay sidelined.
On intra-EMU bond markets, 10-year yield spreads versus German bunds ended nearly unchanged. The only exceptions were the Dutch spread (+16 bps), due to a benchmark change and the Spanish spread (+13 bps) due to a syndicated tap of the 10-year benchmark which offered some bps mark-up (see below).
Overnight, talks between Greek PM Papademos and the three Greek political party leaders ended without an agreement. Pension cuts (+- €0.3B) are the only obstacle to concluding the deal which foresees savings of some €3B this year and another €10B until 2015. A statement issued by Papademos’ office declared “There was broad agreement on all the program issues with the exception of one, which requires further elaboration and discussion with the Troika. This discussion will take place immediately, so as to conclude the agreement in view of the Eurogroup meeting.” Papademos is set to meet again with leaders or contact them on the telephone after concluding his talks with the Troika.
Today, a lot of meetings are scheduled. First of all, there is the continuing Greek austerity issue. Secondly, there are scheduled talks between the lead negotiators for private bond holders and investors to begin preparations for the debt restructuring (PSI). The IIF is prepared to accept an average interest rate of 3.6% on new 30-year Greek bonds according to sources. Thirdly, the ECB has its monetary policy issue. More importantly will be the press conference of ECB Draghi afterwards (see below). Finally, head of the Eurogroup Juncker called a Eurogroup meeting (including IMF Lagarde) for tonight (6 pm CET).
The aim of the additional meeting is most likely to finalize the second Greek bailout package. Therefore, the austerity and PSI components in principle need to agreed on. So we think that there is a good chance that there will be an agreement of the second Greek bailout package by tomorrow morning, which should be supportive for EMU bonds (although it remains to be seen if the rally has much further to go after the sharp moves the past two months). However, keeping in mind the recent Greek brinkmanship, .it might as well be that the story won’t be over.
Today, the eco calendar remains rather thin with only the US jobless claims and industrial production and the trade balance in the UK for release. More attention will go out to the central banks with the ECB and BoE to announce their policy decisions. In the US, the Treasury conclude its mid-month financing operation with a $16B 30-year Bond auction. The Eurogroup meeting starts on 18h, too late to influence European trading, but nevertheless a potential key event.
In the week ended the 28th of January, US initial jobless claims dropped from an upwardly revised 379 000 to 367 000. According to the Labour Department, there were no special factors in the report. As the holiday factors should have eased by now, we believe that the claims are again hovering at more “normal” levels. For the week ended the 4th of February, the consensus is looking for a slight uptick to 370 000, but we believe that a downward surprise is not excluded. The US economy is showing further signs of improvement, which was also visible in the payrolls and we expect that this might push the claims somewhat lower too. In the UK, industrial production is forecast to show a slight uptick in December after falling for two consecutive months. The consensus is looking for an increase by 0.2% M/M, but a downward surprise is not excluded. The visible -trade deficit is expected to stay broadly unchanged from November (-£8600 from - £8644).
Yesterday, Richmond Fed Lacker, a hawk, and San Francisco Fed Williams, a dove took the stage. Lacker who dissented at the January FOMC meeting because he “preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate” So it was no surprise that he said that stronger eco data backed his dissent. Also further out, he sees, absent unexpected developments, no rationale for further easing (answer on question on more QE). More interesting from a market point of view were comments of governor Williams, who sit at the dovish, currently majority, side of the FOMC table, and who previously looked favourably to further easing via QE. “The central bank may yet need to buy more bonds to bolster the weak recovery, but the jobs data make it a close call”, he said to reporters. Further Fed stimulus “is not a slam dunk in the sense that if the economy really slowed or inflation came down a lot- then I think, the case for more stimulus is much stronger, much more obvious”. Concluding, while the door for more QE is still open, it is clear that some members of the majority wing inside the FOMC are contemplating at least about the timing of such a move.
Regarding the ECB meeting, we see the ECB still in a wait and see mode. (see our flash. They took far-reaching liquidity and collateral measures at the December meeting, which were followed by a huge €489B bid for 3-year LTRO liquidity. This calmed down the markets, eased fears of a banking crisis and helped Italy and Spain out of the danger area. There yields fell substantially, making there financing again feasible. The ECB also cut rates twice, in November and December. On top of it, there was some improvement in the economic situation and outlook, while no new developments were visible in inflation. Therefore, such a wait-and-see attitude seems appropriate. However, this doesn’t mean that the meeting will go unnoticed. Markets wait on news about the changes in eligible collateral, which have huge importance for the end of February LTRO. At the January meeting, Mr. Draghi was very satisfied about the huge take-up of liquidity and seemed to hope for another huge liquidity demand at the second LTRO. Will he still incite banks to bid for high liquidity? There were some critical observations of ECB/Bundesbank Weidmann, who was concerned about too much liquidity. Also DB Ackermann showed some unease and left open whether his bank would participate at the 3-year LTRO. Finally Moody’s warned that these huge liquidity infusions were a credit negative for participating banks. So, we will closely listen to Mr. Draghi’s assessment and message to banks.
The second main theme of the press conference might be the possibility of a haircut on the Greek bonds in the ECB SMP portfolio. Until now, the ECB rejected to be implied in a restructuration of the Greek debt, but yesterday, the WSJ reported that the ECB may agree in swapping its bonds for EFSF bonds at purchase price. In an agreement between EFSF and Greece, the latter might “profit from the difference between par and the purchasing price of the ECB. This contribution may help to bridge the financing gap the IMF wants to be closed before closing the second Greek rescue operation. With negotiations still ongoing, Mr. Draghi may keep tight lipped on the issue, unless as we suggest higher, the Greek issue will be concluded today, in which case, Draghi may clarify the ECB position. .
Yesterday, the German Finanzagentur tapped the 5-year Bobl (€4B 0.75% Feb2017) a first time after the successful launch early January.
Total bids amounted to €5.87B, much lower than the €8.97B bids at the launch but more in line with the €6.32B average bid at the final 4 Bobl auctions of 2011. The yield (0.91%) was very close to the record low yield at the launch of the bond (0.9%). The Bundesbank set 17.68% of the issued amount aside for secondary market operations, which is slightly below average, and resulted in an official 1.8 bid cover. The tail of the auction was only 0.01% which is good. So overall, a plain vanilla auction. The Spanish treasury tapped the on the run 10-year benchmark (5.85% Jan2022) via syndication (first time since Mar2011). They intended to sell €2-3B but due to the strong demand (>€6B) managed to do €4B. The bond was priced to yield 30 bps more than the 5.5% Apr2021 SGB, giving it a concession of slightly more than 10 bps. Eventually the tap was priced to yield 300 bps over midswap. The Spanish treasury already completed 29% of this year’s expected bond issuance.
In the US, the treasury auctioned a $24B 10-year Note. The auction went reasonably well. It stopped 1.2 bps below the 1:00 PM bid side and the bid cover (3.05) was slightly below the average of the past year (3.14). The indirect bid, reflecting foreign investor demand was rather weak but the direct takedown was solid. Today, the treasury concludes its mid-month refinancing operation with a $16B 30-year bond auction. Currently, the WI is trading around 3.155%.
Regarding trading, the eco data are few and less important.
Attention will go to the BoE and ECB meetings and the Greek second bail-out negotiations. Regarding the latter, an Eurogroup meeting after European closure may be important.
A number of other meetings taking place beforehand may though strongly suggest whether the Euro group can conclude “successfully” or whether it may try to contain the fall-out of the failure. So, this may move markets ahead of the Eurogroup meeting. There is almost consensus, which makes us always uneasy, that a positive conclusion will weigh on Bunds. Despite unease, in case of a deal, there might be some extra core bond selling. We expect the Bund to test the 137.18 support level, which is the neckline of a potential double top. A Greek deal may lead to a successful break lower, which would be technically important and open the way for trading in the lower part of the broad sideways trading range. The corresponding key support level for the Note future is 129-26. In case of a failure, one should expect Bund safe haven buying.
We agree, but also here we still think that the Bund will have difficulties to move out of the broad sideways trading range.
Indeed, we don’t expect a Greek default to be endangering the financial sector, as everybody had enough time to prepare for such eventuality. It may seem strange, but it could afterwards even be considered as a turning point for the better in the Euro debt crisis.
Longer term, we stick playing the range. We see little value in longer term bonds in case they would break above recent (often historically) highs,
