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Sunrise Market Commentary

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US 7−year Note auction in the focus

Thu, Jul 30 2009, 07:00 GMT
by KBC Market Research Desk

KBC Bank

Markets: Fixed Income

On Wednesday, governments bonds traded broadly sideways, as rising fears about the Chinese recovery were offset by supply concerns following another disappointing US Treasury auction. During the morning session, bonds traded mainly higher, as the sell-off on the Chinese equity markets and talk about lending restrictions triggered concerns that the country’s economic recovery could come under threat. This also pushed commodity prices sharply lower yesterday, although European and US equity markets held up quite well. Bonds moved higher, but fell sharply late in the session after the 5-year Note auction was poorly received. After-wards bonds however rebounded again and closed off the lows.

In a daily perspective, the US yield curve flattened again. Short-term yields moved slightly higher, 5-year yields were up 3.1 basis points, while 10- and 30-year yields closed respectively 2.8 and 4.2 basis points lower. In the euro zone, German yields closed the session almost unchanged, but the intra-EMU sovereign spreads narrowed further.

US 7-year Note auction in the focus

Today, the data calendar contains the European Commission confidence indicators (July), the German unemployment data (July) and US weekly claims.

Last month European Commission’s economic confidence surprised on the up-side of expectations due to increases in business, consumer and services confidence. For July, a further improvement in economic confidence is expected, from 73.3 to 75.0. We believe the risks might be on the upside of expectations as the PMI’s came out better than expected. Nevertheless, the EC confidence indicators remain at relatively low levels compared to the other confidence indicators. In Germany, unemployment is expected to have risen by 43 000 in July. We believe the risks might be on the downside of expectations as the data might still be distorted due to newly introduced measures. In the US, weekly claims are expected to have risen by 16 000 in the week ended July 25. We don’t exclude an upward surprise as seasonal adjustment factors led to artificially low claims in the previous weeks. Continuing claims, which are reported with a one-week lag, are expected to have risen to 6 300 000 (from 6 225 000).

On the supply front, the focus will be on the $28B 7-year Note auction following the disappointing 2- and 5-year Note auctions earlier this week. In the euro zone, Italy plans to tap two BTPs in the 3- and 10-year sector as well as a 7-year CCT for a total amount of €7.75-10.25B. Yesterday, Italy successfully tapped its longer-term inflation linked bond. Following the recent sharp narrowing of the spreads, it will be interesting to see whether demand for government bonds in the euro zone has also weakened.

Today, there are no speeches scheduled from the ECB or the Fed. Yesterday, the ECB bank lending survey indicated that banks had tightened credit conditions at much slower pace than in the previous quarters. The ECB stated that ‘the developments confirm a turning-point in the tightening cycle, although the cumulated net tightening during the past quarters still represents a significant degree of net tightening of credit standards’. As such, we think it’s too early to be confident that a credit squeeze in the euro zone has been prevented. In the US, the Fed’s Beige Book reported that ‘economic activity continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level.’ In June, most regions still reported that conditions were weak or worsening. The Beige Book however warned that commercial property, consumer spending and the labour market were still severely weakened. Overall, the report didn’t provide much new info and impact on markets was consequently limited.

Regarding trading, bond markets traded mainly sideways yesterday, as bonds are currently squeezed between concerns about the recovery in China and concerns about the massive supply of government bonds. Overall, we expect more range trading between the recent highs and lows in the Bund at respectively 122.49 and 119.92. A sustained break below 125-25+ in the US T-Note future would however be a technical important signal that the pressure is still on the downside.

In the UK, the calendar is empty today.

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Published on  Thu, Jul 30 2009, 07:33 GMT