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Sunrise Market Commentary

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Disappointing session for the government bond markets

Fri, Jun 19 2009, 06:54 GMT
by KBC Market Research Desk

KBC Bank

Markets: Fixed Income

On Thursday, the rebound on global bond markets halted, as bonds were sold off following a batch of better than expected US eco data, firmer equities and supply pressures ahead of next week’s auctions.

During the morning session, bonds were still well supported on the back of the losses on the Asian equity markets and the weak opening of the European equity markets. An unexpected decline in UK retail sales added to the bullish sentiment and bonds moved towards the day highs by noon. In the afternoon, bonds however reversed course after the US continuing claims showed their largest drop since 2001 and the leading indicators and Philly Fed survey surprised on the upside. The better than expected US eco data also supported the equity markets, which added to the sell-off on bonds. The more as supply concerns moved again to the forefront following the US Treasury announcement of next week’s auctions, when its plans a $40B 2-year note auction, a $37B 5-year note auction and a $27B 7-year note auction.

In a daily perspective, the belly of the curve was hit the hardest in the US, with 5-, 7- and 10-year yields rising by respectively 16.2, 17.5 and 14 basis points compared to 9.1 and 9.4 basis points in 2- and 30-year yields. In the euro zone, there was a bear steepening of the yield curve, as German 2-year yields were almost unchanged, but 5-, 10- and 30-year yields rose by more than 5 basis points. The intra-EMU sovereign spreads narrowed slightly on the better than expected eco data, although the Spanish 30-year bond auction showed rather poor demand. The French auctions, which were skewed to the short end of the curve, went much better.

Disappointing session for the government bond markets

Today, the eco calendar is uneventful as it only contains some second-tier European figures like the Belgian consumer confidence survey and the Italian first quarter unemployment rate, which are no market movers. In the US, the calendar is empty, but on the ECB front, several governing council members (Bini Smaghi, Gonzalez- Paramo, Draghi) are scheduled to speak today. We do not expect them to break new ground, as the council has adopted a wait-and-see stance on monetary policy following the recent introduction of the drastic conventional and unconventional measures. As such, unless something dramatic happens over the summer, we expect the council to wait at least until the September meeting before adapting their monetary policy stance. On the supply front, Italy will announce the details of their auctions next week, while Belgium is preparing the issuance of new 3-year benchmark via syndication.

Regarding trading, yesterday the rebound on the government bond markets halted brusquely, as bonds were sold off on the back of some better than expected US eco data, rising equities and supply concerns. As such, the US T-Note future failed to break above 115-06+, a previous break down, which was needed to improve the short-term technical outlook. The Bund, which had broken above the neckline of a short-term double bottom formation at 119.31, closed again below this level raising doubts about the sustainability of the recent rebound. The short-term outlook will now mainly depend on the equity markets, as yesterday’s sharp decline has indicated that underlying sentiment on the bond markets is still bearish despite the recent rebound. So unless equities extend their recent correction lower and risk appetite deteriorates further, it appears that the rebound in bonds has already run out of steam.

In the UK, the calendar is empty too.

In an interview with the Southern Daily Echo, BoE’s King sounded again very cautious on the economic recovery, despite the recent signs of improvement in financial markets.

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Published on  Fri, Jun 19 2009, 06:58 GMT